As a merchant, you know that refunding a purchase is inevitable. Perhaps your service delivery didn’t go as planned and you want to refund a partial amount as a gesture of good will. While these two types of transactions might seem to be similar, they are not. If you issue the wrong type of refund, it will cost you.
Credit card refunds can be caused by many different circumstances. No matter what you call them, there are two primary forms of credit card refunds and chances are you or your employees are not using them correctly. Many merchants and their employees believe that a refund is a refund.
Taking a look at what happens behind the scenes, every credit card transaction goes through two stages. In the first stage, a transaction is “authorized” and funds from the customers credit line are reserved for the transaction. At this point, if the cardholder looks at their account online, they will see a “pending” charge. In the second stage, called the settlement, funds have started moving between the card issuing bank and your merchant account. This is when your daily batch is submitted and settled.
During the authorization stage you have the opportunity to “void” the transaction. This effectively deletes the transaction as if it never occurred. While a voided transaction is never sent to the issuing bank for payment, the cardholder will still see a pending charge for two to three days when they view their account online. When the issuer sees that the transaction was not submitted or settled, they will release the pending amount back to the cardholder’s credit line. Voiding a transaction prevents you from paying discount rates since no money was ever exchanged.
Once a transaction has been settled, voiding the transaction is no longer an option. Once a transaction is settled, you will pay the discount rate for the original transaction. At this point, the only option to give money back is to issue a refund to the cardholder. A refund is the opposite of a sale and funds are routed from the merchant’s bank account back to the cardholder’s card. The main differences in processing a sale and a refund are that devices such as terminals and POS systems don’t request authorization from the card issuing bank to send funds to a cardholder’s account. In some cases, you may be charged an additional discount rate for the returned amount. While this is rare, some Merchant Services Providers charge additional fees for refunds.
Reversal and Refunds
While the two names sound very similar, they are not. A reversal is effectively the same as a void. The difference with a reversal is an additional step of communicating with the card issuing bank to inform them that you wish to release the previously authorized amount. This will prevent you from paying any discount fees for the transaction. Note that you will likely incur a transaction fee for this. Now that you know this, processing a reversal is a better way of voiding a transaction since the pending amount is released from the cardholder’s account much more quickly.
In summary, if your daily batch has not been closed, reversing or voiding a transaction will prevent money from moving and that saves you from being charged a discount rate on that sale. If the transaction was in a batch that has already been settled, the only option left is to refund the cardholder.
