The Difference Between Refund & Reversal Transaction Explained

As an online store owner, I’ve dealt with many refunds, reversals, and chargebacks.

You should know the differences and similarities among the three, and I’ll cover those throughout this guide.

Let’s dive in.

Key Takeaways

• Merchants initiate refunds and authorization reversals, while customers initiate chargebacks.
• Refunds and chargebacks occur after a transaction; authorization reversals happen before settlement.
• Chargebacks involve a dispute process and can incur merchant fees, unlike refunds and authorization reversals.
• Refunds return funds to the customer's account after the transaction; authorization reversals prevent funds from reaching the customer's account.
• Chargebacks are often driven by customer dissatisfaction or suspected fraud, while refunds and authorization reversals are due to merchant errors or customer cancellations.
• 81% of customers have at one point chosen chargebacks over refunds for convenience.

Main Differences: They’re the Same (In a Sense)

Refunds are a type of merchant-authorized payment reversal where the seller returns funds to the customer after completing a transaction.

However, other types of reversals exist, such as chargebacks and authorization reversals. 

Customers initiate chargebacks through their bank or credit card company to dispute a transaction. Authorization reversals occur when a merchant cancels a pending transaction before it settles.

This article technically isn’t “refunds versus reversals,” but moreso “refunds versus authorization reversals versus chargebacks.”

1. Time to Process & Fees

Processing time:

• Chargebacks: Take weeks or months to resolve, as they involve a dispute process between the cardholder, merchant, and card issuer.
• Authorization reversals: Typically occur within 24–48 hours, as they involve canceling a pending transaction before it settles.
• Refunds: Can take several days to process, depending on the merchant's policy and the payment processor.

Chargebacks often result in chargeback fees for the merchant, typically ranging from $15 to $100 per chargeback. These fees increase if the merchant has a high chargeback rate. Or if they arbitrate a chargeback.

These fees stack on top of losing the sale and potential revenue.

Authorization reversals don’t incur fees. Regarding refunds, merchants will have to pay fees from their payment processors. These will vary by processor, of course.

2. Where the Money Goes

Businesses return funds to the customer's account during a refund after being deducted and transferred to the merchant's account. This is a post-transaction action.

Chargebacks are the same but involve a dispute process and cost the seller a lot more money.

When an authorization reversal happens, the funds never reach the customer’s account.

3. Initiator

• Refunds: Merchant
• Chargebacks: Cardholder
• Authorization Reversals: Merchant

With authorization reversals and refunds, customers bring up an issue about a transaction with the merchant. Then, the merchant reverses or refunds the transaction. Depending on when the transaction happened.

Chargebacks only happen post-transaction once money has left the customer’s account. If money didn’t leave the consumer’s account, they wouldn’t have any grounds to file a chargeback.

4. When It’s Applicable

Refunds typically occur when customers aren’t happy with a purchase they made. Sometimes, the reasons are legitimate, while others are the result of buyer’s remorse.

This can include situations where:

• Consumer received a damaged or defective item.
• Product does not match the description or expectations.
• Shopper changed their mind and no longer want the item (depending on the merchant's return policy).
• Seller agrees to a refund due to an error on their part (e.g., incorrect item shipped, duplicate charge).

Customers initiate a chargeback when they believe the business wrongly charged them or they haven’t received the goods or services they paid for.

Common scenarios include:

• Customer suspects fraudulent activity on their account.
• Charge is unauthorized or the customer does not recognize it.
• The merchant fails to deliver the product as promised.
• Product or service received is different from what was advertised.
• Customer has a dispute with the merchant that cannot be resolved directly.

Merchants will initiate an authorization reversal before a transaction is finalized.

These are common in situations where:

• Merchant identifies an error in the transaction, such as an incorrect amount or duplicate charge.
• Customer cancels an order before it has been processed or shipped.
• Payment processor declines the transaction due to insufficient funds or other issues.
• Seller chooses to void a transaction for internal reasons (e.g., inventory issues, customer request).

Comparing the Two

The following sections will go more in-depth about refunds and reversals (in general). Keep reading to learn what each is, when they happen, and other important information to know as a business owner.

1. What Are Refunds & How Do They Work?

Refunds are when a merchant returns money to customers after a purchase. It typically occurs when the customer returns a product for one of many reasons or cancels a service.

Here's how they work:

1. A customer requests a refund, usually within a specified period.
2. The business verifies the claim and checks the return policy.
3. If the claim is valid, the business processes the refund.
4. Funds are returned to the customer's original payment method.

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Sellers allow returns to increase customer satisfaction and build trust. This practice encourages sales, as customers feel secure knowing they can get their money back if they are unsatisfied. Moreover, sellers provide feedback about product quality and customer preferences.

For instance, if a shopper returns an item that doesn’t match the website’s product description, the merchant knows to rewrite it.

The average return rate for purchases was more than 14% [1]. And 16% of retail sales are returned in the US (in 2021 and 2022) [2]. The reasons for returns differ by reason:

Typical Refund Types Businesses Will Encounter, When They’re Applicable, & Examples

Summary:

• Full refunds return the entire purchase amount for returned products in original condition.
• Partial refunds provide a portion of the purchase amount for used or damaged returns.
• Store credit and exchanges offer alternatives to cash refunds.
• Cash refunds and credit card refunds return money to the original payment method.
• Gift receipt refunds provide store credit for gifted items.
• Digital product refunds apply to software or online services.
• Restocking fee refunds deduct a fee from the refund amount.

Businesses will typically run into these refund types:

1. Full Refund: Applicable when a customer returns an item in original condition. Often used for defective products or dissatisfaction.

Example: A customer returns a defective laptop within 30 days, receiving a full refund to their credit card.

2. Partial Refund: Given when only part of the order is returned or if the product is slightly used or damaged. Also used for service-related refunds.

Example: A customer returns a shirt with a small stain, and the store offers a 50% refund.

3. Store Credit: Used when a customer prefers to exchange for a different product instead of a cash refund. Often applied to final sale items.

Example: A customer returns an unwanted gift without a receipt and receives store credit for future purchases.

4. Exchange: Applicable when a customer wants a different size, color, or version of the same product. No cash refund involved.

Example: A customer exchanges a pair of shoes for a different size, without a cash refund.

5. Cash Refund: Used for purchases made with cash. Less common but necessary for some brick-and-mortar stores.

Example: A customer returns an item bought with cash and receives their money back immediately.

6. Credit Card Refund: Applicable for online and in-store purchases made with a credit card. Sellers then process the refund to the shopper’s original card.

Example: A customer returns a defective smartphone, and the refund is processed back to their credit card.

7. Gift Receipt Refund: Applicable when the product was a gift. The recipient can return it for store credit or exchange.

Example: A customer receives a gift with a gift receipt, returns it, and gets store credit for another item.

8. Digital Product Refund: Used for software or online services. Often restricted due to potential for unauthorized use.

Example: A customer requests a refund for an online course within the 7-day satisfaction guarantee period and receives their money back.

9. Refund with Restocking Fee: A portion of the purchase price is deducted to cover the cost of processing the return and restocking the item. This may be applied to certain products, such as electronics or opened software.

Example: A customer returns an opened electronic device within the return period, and the store charges a 15% restocking fee, deducting it from the refund amount.

2. Learn What Reversals Are & How They’re Similar

Other names:

• Credit reversal
• Reversal payment

Payment reversals are a scenario where the business returns funds from a transaction to a customer.

The term "reversal" in transaction processing encompasses 3 scenarios:

1. Refunds (Merchant initiates): Happens after a transaction is completed, returning funds to the customer due to various reasons like product dissatisfaction or errors.
2. Authorization Reversals (Merchant initiates): Cancels a pre-authorization hold on a customer's account before it becomes a settled transaction.
3. Chargebacks (Customer initiates): Initiated through a bank or credit card company to dispute a settled transaction due to issues like fraud, unauthorized charges, or product/service dissatisfaction.

The difference lies in the timing and the party initiating the reversal. Merchants initiate refunds and authorization reversals while customers start the chargeback process.

Yes, refunds are a type of reversal. In a way, refunds and reversals aren’t different.

Summary: A reversal in transaction processing refers to the cancellation or reversal of funds, and can be initiated by the merchant or the customer for various reasons.

When Reversals Are Applicable

We’ve already seen when refunds happen. Here are scenarios where chargebacks and authorized reversals are applicable:

Chargebacks:

• Suspected fraudulent activity on the account: Customer notices an unfamiliar charge on their statement and suspects someone stole their card information.
• Unauthorized charges on the statement: A family member makes a purchase without the cardholder's permission.
• Non-delivery of purchased goods or services: Consumer orders a product online but never receives it, despite the merchant's claim of shipment.
• Difference between product and description: Shopper purchases a "new" item that arrives used or damaged.
• Dispute with the merchant that remains unresolved: Cardholder attempts to return a defective product but the merchant refuses to provide a refund.

Authorization Reversals:

• Error in the transaction amount: A merchant accidentally charges $100 instead of $10 for a product.
• Processing of a duplicate charge: Due to a technical error, the seller charges a purchaser twice for the same purchase.
• Customer cancellation of order before processing or shipment: A consumer changes their mind about a purchase and contacts the merchant to cancel it before it ships.
• Merchant declines transaction due to insufficient funds: A shopper attempts to make a purchase with a debit card without enough funds.
• Merchant voids transaction for internal reasons: A merchant runs out of stock for a product and cancels pending orders.

You Should Also Know What a Chargeback Is

A chargeback is a reversal initiated by the cardholder who disputes a transaction with their bank or payment processor.

The process involves the cardholder filing a complaint, the bank investigating the claim, and the merchant potentially providing evidence to counter the dispute.

Chargebacks incur fees, typically from $15 to $100 per chargeback. Excessive chargebacks can label a business as “high-risk” to payment processors.

This can lead to businesses losing access to those processors, preventing the acceptance of card payments.

The inability to use payment processors could eliminate a business’ ability to function. Since they can’t receive payments.

To prevent chargebacks, businesses should:

• Prioritize clear communication with customers
• Have accurate product descriptions
• Ensure timely delivery of goods or services
• Address customer complaints promptly and efficiently

The last point is important because it ties in with refunds. More than 81% of customers file chargebacks because it’s often easier than dealing with refunds [3]. Thus, businesses should make the refund process as smooth as possible (when applicable).

Chargeback alerts are the solution because they allow businesses to refund transactions automatically. Potentially preventing customers from escalating to chargebacks. We, for instance, combine some of the top alert providers (e.g., Ethoca) to make refunds easier.

Summary: Chargebacks, reversals initiated by the customer, harm businesses financially and operationally, necessitating proactive measures to minimize their occurrence.

Wrapping Up

While merchants initiate refunds and authorization reversals, customers start the chargeback process. Refunds and chargebacks occur post-transaction, whereas authorization reversals happen before transaction settlement.

Unlike refunds and authorization reversals, chargebacks involve a dispute process and can result in merchant fees.

Chargeback alerts, like what we offer, can help prevent chargebacks from occurring. Saving your business money in the long term. Learn how we can help.