What Are Payment Reversals And 8 Easy Ways To Prevent Them

Imagine closing out the month with 50,000 USD in sales but only 2,000 USD in profits, instead of the expected 8,000 USD due to payment reversals.

Payment reversals are a common challenge businesses face in the e-commerce sector. In 2024 alone, retailers lost a staggering 103 billion USD to fraudulent returns and claims.

While payment reversals exist to protect consumers and keep e-commerce running smoothly, they come at a real cost for merchants. Every reversal means lost revenue, added fees, and operational headaches; for high-volume businesses, even a small increase in reversals can quickly become a major financial burden.

What is a payment reversal?

Payment reversals occur when a completed or pending transaction is cancelled, and the money is returned to the customer’s account. It is also sometimes referred to as a credit card reversal.

What’s the difference between a payment reversal and a returned payment?

Although the two terms sound similar, payment reversal is essentially a transaction that is undone after being initiated.

For example, if a customer were charged twice at checkout, the merchant would issue a refund to reverse the duplicate payment.

On the other hand, a returned payment is a transaction that failed to go through because the bank rejected it before it was completed. In other words, it is a bounced payment.

For instance, a customer sets up an automatic debit to a streaming service, but when the streaming service provider tries to pull the money, their bank account is empty. So the payment is returned, and they’re charged a fee.

What are the reasons for payment reversals?

Payment reversals can happen due to a lot of reasons, some of the most common ones include:

• Duplicate transactions
• Merchant errors, like requesting the wrong amount
• An item being sold out
• Customers returning the product due to defects or damage
• Payment made with a stolen card or account details
• The legitimate cardholder disputes the charge as fraudulent
• Entering the wrong payment amount
• Network errors or glitches in the payment system

How do payment reversals work?

There are five main types of payment reversals, and each works differently.

1. Authorisation reversal

Before we get into authorisation reversal, let’s understand how payments are processed behind the scenes.

When a customer makes a purchase, the merchant’s payment system first requests authorisation from the issuing bank. If the bank approves, a temporary hold is placed on the customer’s funds.

If the merchant or customer notices an error with the purchase during this period, the merchant can initiate a reversal of the transaction. This means the transaction is cancelled, and the temporary hold placed on the customer’s money is lifted, making funds available in their account.

For example, Mike buys a pair of shoes from The Shoe Brand online. After he completes the purchase, the Shoe Brand notices that they accidentally charged Mike twice for the same purchase. So rather than letting the payment go through, they cancel and reverse the transaction, and the funds become available in Mike’s account.

Since an authorisation reversal happens before the payment is officially settled, the charge never appears on the customer’s account, and they get a smooth, hassle-free experience.

2. Void transaction

A void transaction works similarly to authorisation reversals–the funds don’t leave the cardholder’s account. However, here the transaction is authorised but prevented from being settled.

After the bank approves a payment, the next step in transaction settlement is the merchant capturing the funds, or in other words, the money getting transferred to the merchant’s account.

However, if it is at this point that the merchant realises they had charged the customer twice for the same purchase, they issue a void. The void cancels the transaction entirely and releases the hold on the customer’s funds.

3. Reversal adjustment

A reversal adjustment is used to undo or modify a previously recorded transaction.

For instance, if the Shoe Brand charged Mike 500 USD instead of 50 USD for the shoes, rather than cancelling the original transaction, the Shoe Brand can perform a reversal adjustment of 500 USD to cancel out the mistake and then post the correct 50 USD charge.

This way, the net effect cancels out the error while keeping a complete record of both the original transaction and the correction.

4. Refund

Refunds happen once a transaction is settled. 

For instance, if Mike finds the pair of shoes he ordered online to be of the wrong size when they arrive, he would contact the Shoe Brand for a refund.

Since the original payment has already been completed, the merchant can’t just undo the transaction like an authorisation reversal. Instead, they’ve to process the refund as a separate transaction. This means refunds don’t happen instantly, and can take up to 7 business days for the money to reappear in the customer’s account.

Furthermore, with refunds, businesses not only have to return the payment but also pay interchange fees and cover the cost of shipping the goods back from the customer.

Nearly 40% of consumers return an online purchase at least once a month, making refunds one of the most common types of payment reversal.

5. Chargeback

Authorisation reversals and refunds are both initiated by the merchants, but chargebacks are initiated by customers, usually when they dispute a transaction.

For instance, if Mike notices a 50 USD charge on his bank statement that he doesn’t recognise, he would contact his bank and report the charge as fraudulent. After reviewing and investigating the claim, the bank will return the 50 USD to Mike’s account and debit it from the Shoe Brand’s account.

Unfortunately, not all chargebacks are legitimate. Sometimes, cardholders use it to commit friendly fraud. For example, a customer might receive a product they ordered but still file a chargeback, claiming it never arrived.

According to Chargebacks 911, 72% of merchants reported an increase in friendly fraud chargebacks in 2024.

If merchants believe the claim is inaccurate or fraudulent, they can challenge the validity of the chargeback by submitting evidence such as a receipt, shipping confirmation, or proof of service. This process is known as representment.

How do payment reversals affect businesses?

Payment reversals play a vital role in e-commerce. They:

• Reduce friction between merchants and consumers
• Protect consumers against fraud
• Ensure disputes are handled fairly
• Strengthen security
• Support regulatory compliance
• And protect a business’s reputation.

Payment reversals create a smoother and more trustworthy experience for consumers. However, they can also create significant challenges for businesses.

Financial obligations

Payment reversals often come with additional financial burden. Every refund and chargeback is associated with additional expenses like interchange fees, processing charges, and shipping costs, which can add up over time.

Chargebacks usually carry a processing fee that can range from 20 USD to 100 USD or more, depending on the bank or payment processor.

Additionally, the business loses the shipped product/service and has to invest time and resources to review disputes, gather documentation, and respond to claims. All of these add to overhead expenses.

Operational disruption

The way businesses manage payment reversals can impact customer relationships. If a customer has to wait too long for a refund or for a legitimate transaction issue to be resolved, it can lead to dissatisfaction and negative reviews.

At the same time, each payment reversal pulls staff from finance, support, and compliance teams away from core business activities to investigate the issue, coordinate with payment processors, and respond to the disputes.

Unlimit’s payment processing platform helps businesses reduce operational burden on finance and support teams by streamlining dispute management and automating compliance checks. This way, customers get their refund promptly, while your teams stay focused on running the business.

Business closure

When payment reversals, especially chargebacks, become standard practice, it can result in a merchant being labelled as high risk. 

Typically, for Visa, a ratio of 2.2% can put a merchant in the Visa Acquirer Monitoring Program (VAMP), which can lead to penalties such as higher processing charges, frozen funds, or even the termination of their merchant account. 

Without the ability to process payments, most businesses, especially those operating primarily online, cannot function. Even before reaching that point, the annoying financial losses, mounting fees, and reputational damage caused by excessive reversals can make it difficult for a business to remain profitable.

Over time, these pressures can force a company to scale back operations or close entirely.

At Unlimit, we help businesses minimise these challenges and improve their bottom line through smarter payment routing, advanced fraud protection, and real-time transaction monitoring. Learn more about our products here.

How to prevent payment reversals?

Sometimes payment reversals are unavoidable. However, with the right strategies, businesses can reduce the frequency of occurrence.

#1 – Transparent communication

Keeping consumers informed is one of the easiest ways to reduce payment reversals. When customers understand what to expect, they’re far more likely to resolve issues directly with the merchant rather than initiating a payment reversal.

Unlimit Smart Tips:

• Provide detailed invoices, easy-to-read receipts, refund policies, and customer service options
• Send timely updates on order status
• Keep customers informed about shipping updates or service delays.

#2 – Better customer service

If your customers can’t reach the business when they run into problems or feel their concerns aren’t being addressed, they may turn to their bank for a chargeback instead. So businesses should offer responsive, accessible, and helpful support.

Unlimit Smart Tips:

• List contact information on the website where customers can easily find it
• Offer multiple support channels, such as live chat, email, phone, etc
• Train staff to handle disputes with empathy and efficiency.

Sometimes, quick refunds or replacements also show goodwill and can prevent escalations.

#3 – Integrating inventory and payment systems

When the stock control and payment platforms don’t interact with each other, mistakes can occur, such as selling out-of-stock items, double-charging, and failing to update order statuses. These errors increase the likelihood of refunds or disputes.

Unlimit Smart Tips:

• Link stock management with the payment process. This ensures that only available items are sold, and customers are updated in real-time, resulting in a smoother shopping experience.

#4 – Provide clear billing descriptors

One of the most common reasons for chargebacks is that customers don’t recognise a charge on their bank or card statement.

Unlimit Smart Tips:

• Use clear and consistent billing descriptors that reduce confusion
• The description should include the company’s full name (for example, the Shoe Brand) and not the legal entity (SBLLC)
• When possible, also include additional context, like a website or customer service number.

This way, when a customer reviews their statement, they can connect the charge to a legitimate purchase they made.

#5 – Use fraud prevention tools

When a criminal uses stolen card details to make a purchase, the legitimate cardholder will eventually dispute the charge.

Unlimit Smart Tips:

• Use device fingerprinting, geolocation checks, and velocity rules to spot suspicious activity
• Implement CVV checks, two-factor authentication and 3D Secure (3DS)
• Adjust fraud rules based on the business model.

At Unlimit, our in-house fraud monitoring tools and 3D Secure add layers of security to our solutions and services. This way, merchants can detect and block suspicious activity before the payment is completed, thereby reducing the risk of chargebacks and protecting genuine customers by assuring them that their information is safe.

#6 – Enrol in pre-dispute programs

Some card networks and payment processors offer pre-dispute programs that allow merchants to address potential disputes before they escalate into formal chargebacks. 

In these programs, when a customer contacts their bank about a questionable transaction, the bank alerts the merchant first. This gives the merchant a short window of time to resolve the issue directly.

Unlimit Smart Tips:

• Enrol in chargeback alert programs, such as Visa Rapid Dispute Resolution (RDR) and Ethoca Alerts
• Automate responses to alerts to reduce manual workload.

#7 – Analyse payment reversal trends

By closely monitoring and analysing payment reversal trends, businesses can gain insights into why reversals occur and can take proactive steps to reduce them.

For example, if a specific packaging issue is causing the products to be damaged by the time they reach customers, fixing the packaging issue can quickly stop the refund requests.

Unlimit Smart Tips:

• Review data on refunds, chargebacks, and voids to identify patterns.
• Ask customers for feedback on why they’re requesting a refund.

Businesses leveraging Unlimit’s all-in-one merchant dashboard gain actionable insights and spot common triggers for reversals, allowing them to address the issues before they escalate. Learn how we can help your business.

FAQs

How long can a payment reversal take?

A payment reversal can take anywhere from a few minutes to several weeks, depending on the type of reversal being processed. For instance, authorisation reversals are usually instant, while refunds take 3-7 business days. Returned payments clear in 2-5 days, whereas chargebacks can take weeks or even months to resolve.

Is reverse payment a refund?

A refund occurs when a merchant returns money to the customer after a purchase has been completed. A payment reversal is an umbrella term that covers scenarios such as authorisation reversals (cancelling a payment before it’s settled), chargebacks (when a customer disputes a charge through their bank), or voids (cancelling a transaction before it’s fully processed).

What is the difference between a refund and a chargeback?

A refund is issued directly by the merchant to return money to the customer after a transaction is completed. On the other hand, a chargeback is initiated by the customer’s bank or card issuer when the customer disputes a transaction.

What is a payment reversal on a credit card?

A payment reversal on a credit card is when a previously authorised or completed transaction is cancelled and the funds are returned to the cardholder’s account. This can happen for several reasons, including merchant errors, disputes, or product returns.