What is a Payment Reversal?

A payment reversal, also known as a chargeback, refund or ACH return, occurs when funds from a completed transaction are returned to the payer’s account. This process can be initiated by the customer, the merchant, or the financial institution involved in the transaction. Payment reversals are typically the result of an error, dispute, or fraud, where the original payment needs to be undone.

Common Causes of Payment Reversals

Payment reversals can occur for various reasons, often leading to financial losses and operational challenges for businesses. Understanding the common causes is crucial for implementing effective prevention strategies.

1. Customer-Initiated Reversals

Customer-initiated reversals occur when the buyer requests a refund or disputes a transaction, leading to the reversal of the payment. Here are the common causes:

1.1 Customer Disputes/Chargebacks

Disagreements over the quality of goods or services, billing errors, or non-delivery can lead customers to initiate a chargeback if they feel their complaint is unresolved.

1.2 Refund Requests

Customers may request a refund due to dissatisfaction with a purchase, defective products, or simply changing their minds. Refunds are typically initiated by the merchant and result in a reversal of the original payment.

1.3 Subscription Cancellations

If a customer cancels a subscription or service, they might request a reversal for payments made after the cancellation date, especially if the merchant did not process the cancellation in time.

1.4 Authorization Issues

Payments with expired credit cards, insufficient funds, or mismatched billing information may initially be processed but later reversed by the bank due to lack of proper authorization.

2. Merchant Errors

Merchant errors include mistakes like incorrect transaction processing, merchant error, etc.:

2.1 Processing Errors

Technical issues like double charges, incorrect amounts, or delayed transactions can result in payment reversals. These errors might occur due to glitches in payment gateways, POS systems, or human mistakes.

2.2 Merchant Error

Mistakes such as charging the wrong account, entering incorrect transaction details, or failing to fulfill the terms of sale can lead to payment reversals, with the merchant often bearing the financial loss.

2.3 Regulatory Compliance

Transactions that violate financial laws or regulations might be reversed by financial institutions, affecting merchants who did not adhere to legal requirements.

3. Fraudulent Transactions

Unauthorized use of a customer’s payment method, such as stolen credit cards or identity theft, is a common cause of payment reversals. Customers may request a chargeback to recover funds lost through fraud.

Types of Payment Reversal

1. Authorisation Reversal

Authorization reversal is a proactive step taken to cancel a payment before it is fully processed and completed. This process is usually initiated when either a customer or a vendor notices an issue with the transaction, such as incorrect payment amounts or duplicate charges. As they prevent the funds from being moved in the first place, authorization reversals are generally the simplest and most hassle-free solution for both customers and businesses.

2. Refunds

Refunds occur when a transaction needs to be reversed after the payment has been completed and the funds have been transferred. Typically, refunds are requested by customers who are dissatisfied with their purchase or service received. This process involves direct communication between the customer and the vendor to resolve the issue. For businesses, refunds can be costly as they often include not just the return of the payment but also additional fees, such as interchange fees.

Check out: Why refunds take time.

3. Chargebacks

Chargebacks happen when a customer disputes a transaction by contacting their bank to contest a charge on their account. Common reasons for chargebacks include suspected fraudulent activity or failure to receive the goods or services paid for. For businesses, chargebacks are more than just an inconvenience; they can lead to significant financial burdens due to chargeback fees and potential penalties imposed by card networks.

Also Read: Chargeback vs Refund: Key Differences

How Long Do Payment Reversals Take?

The time it takes for a payment reversal to be processed can vary depending on several factors, including the payment method, reason for the reversal, and the specific policies of the involved financial institutions. However, here are general estimates for different types of reversals:

Authorization Reversals Processing Time

These occur before a transaction is fully completed and can often be processed instantly* or within a few minutes.

Refunds Processing Time

• Credit card refunds: Typically take 3-5 business days* to reflect on the customer’s account.
• Debit card refunds: Can range from immediate to 5 business days* depending on the issuing bank and payment network.
• Digital wallet refunds: Often processed instantly or within a few hours.

Chargebacks Processing Time

The most time-consuming type of reversal, the chargeback process can take anywhere from 30 to 90 days* to resolve.

*It’s important to note that these are general estimates, and actual processing times may vary depending on specific circumstances.

Impact of Payment Reversals on Businesses

Payment reversals can have a significant negative impact on businesses, affecting their bottom line and reputation.

Financial Loss

• Direct revenue loss: The most immediate impact is the loss of the original sale amount.
• Chargeback fees: Merchants are typically charged fees for each chargeback processed, which can erode profits.
• Increased processing costs: A high chargeback rate can lead to increased processing fees imposed by payment processors.

Reputational Damage

• Damaged customer relationships: Chargebacks can erode customer trust and loyalty, even if the merchant is not at fault.
• Negative online reviews: Dissatisfied customers may share their experiences on social media or review platforms, harming the business’s reputation.

Chargeback Fees

• Financial penalties: Merchants incur fees for each chargeback processed, which can be substantial.
• Increased processing costs: Excessive chargebacks can lead to higher processing fees imposed by payment processors.
• Potential account restrictions: Payment processors may impose restrictions or terminate accounts with high chargeback rates.

Understanding the full extent of these impacts is crucial for businesses to develop effective strategies to prevent and manage payment reversals.

How to Avoid Payment Reversals?

Minimizing reverse payment is crucial for maintaining smooth business operations and customer trust. Achieving this goal involves leveraging robust payment technologies and ensuring that employees adhere to best practices. Often, human errors contribute significantly to these reversals, making it essential to focus on both technical and operational excellence.

1. Link Authorisation Requests and Transaction Messages

Implementing a Transaction Identifier (TID) system ensures a direct connection between authorization requests and related messages. By assigning a unique TID to each transaction, merchants can track the entire payment process and prevent mismatches that may lead to reversals.

2. Utilise Surface Trace Audit Numbers

A Surface Trace Audit Number is a unique identifier that facilitates communication about a specific transaction. This system helps maintain a comprehensive record of all communication related to a transaction, enabling merchants to resolve issues efficiently and avoid reversals.

3. Implement Retrieval Reference Numbers

Retrieval Reference Numbers tie estimated sales to the original authorization request. By establishing this link, merchants can accurately reconcile transactions and prevent payment reversals caused by discrepancies between estimated and actual amounts.

4. Enable Authorisation Characteristics Indicator

The Authorisation Characteristics Indicator is a feature that allows merchants to note estimated incremental or estimated transaction totals. This indicator helps ensure accurate payment processing by providing a clear indication of the transaction’s nature, reducing the risk of reversals due to misunderstandings.

5. Monitor Duration Field

The Duration Field specifies the total number of days for tabulating charges. Informing customers about the duration of charges can help reduce misunderstandings and prevent payment reversals caused by confusion over billing periods.

6. Prompt Transaction Data Submission

Clearing transactions promptly is essential to avoid issues such as customers’ checking accounts becoming empty or customer confusion. Timely transaction data submission minimizes the chances of payment reversals by ensuring that funds are processed efficiently and accurately.

7. Use Clear Billing Descriptors

Clear billing descriptors on transaction statements help customers recognize and attribute charges correctly. For example, a billing descriptor like “ABC Company—Online Store” is easily readable and reduces the likelihood of customers disputing charges due to unfamiliarity.

8. Confirm the Projected Clearing Date

Setting up automated email confirmations that indicate when funds will be withdrawn can aid customer memory, purchase recognition, and payment preparedness. This practice helps customers anticipate charges, reducing the chances of payment reversals due to confusion or oversight.

9. Employ Incremental and Estimated Authorisations

For businesses with variable, time-dependent rates, incremental authorizations can minimize the risk of chargebacks. This approach allows merchants to obtain authorization for an estimated amount initially and then clear the actual amount, aligning with customers’ expectations and reducing disputes.

10. Process Authorisation Referrals Quickly

Addressing errors during transactions without delay is crucial. If authorization is declined, promptly processing an authorization reversal helps return funds to customers promptly, encouraging successful transactions and preventing unnecessary reversals.

Best Practices for Handling Payment Reversals

To minimize the impact of payment reversals, businesses should implement effective strategies focused on prevention, dispute resolution, and recovery.

Minimize Chargeback Rates

• Proactive fraud prevention: Employ advanced fraud detection tools and implement strict security measures to prevent unauthorized transactions.
• Clear refund policies: Establish transparent and customer-friendly return and refund policies to reduce disputes.
• Effective dispute resolution: Train staff to handle customer inquiries promptly and professionally, aiming to resolve issues before they escalate to chargebacks.

Recover Lost Funds

• Chargeback dispute process: Understand the chargeback process and gather necessary documentation to contest unjustified chargebacks.
• Chargeback prevention services: Consider using specialized services to help prevent and manage chargebacks.

Frequently Asked Questions (FAQs)

1. What is an example of a payment reversal?

A common example of a payment reversal is a chargeback, where a customer disputes a transaction with their bank, leading to the reversal of funds from the merchant’s account. Another instance is when a customer requests an instant refund for a faulty product or service, prompting the merchant to initiate a reversal of the payment.

2. Are there consequences for excessive payment reversals or chargebacks?

Yes, excessive payment reversals or chargebacks can have severe consequences for businesses. Card networks and acquiring banks may impose fines, increase transaction fees, or even terminate merchant accounts if the chargeback ratio exceeds acceptable thresholds. Additionally, a high volume of reversals can damage a business’s reputation and lead to decreased customer trust.

3. What is the difference between a refund and a reversal?

A refund is a payment reversal initiated by the merchant, typically due to customer dissatisfaction or a returned product. The merchant voluntarily returns the funds to the customer’s account. In contrast, a reversal is a forced transaction where funds are withdrawn from the merchant’s account, often initiated by the customer’s bank or card issuer in cases of disputes or suspected fraudulent activity.

What is a Payment Network?

A payment network is a system that processes electronic payments between consumers, businesses, and financial institutions. By connecting merchants, banks, and card issuers, it enables seamless processing of credit, debit, and other electronic transactions. These networks act as intermediaries, ensuring secure and efficient transfer of funds.

Common payment networks include SWIFT, which facilitates international bank transfers, and blockchain-based systems, known for offering decentralized and transparent transaction ledgers. Other examples include contactless payment technologies like mobile wallets (e.g., Apple Pay, Google Pay) and traditional networks such as Visa and Mastercard, which are widely used for credit and debit card transactions.

Types of Payment Networks

1) Credit Card Networks

They are categorized into open and closed systems. The former include Visa and Mastercard, which allows third-party financial institutions to issue credit cards for online card payment. Closed networks include American Express and Discover, which issue cards directly to consumers. These networks facilitate transactions by connecting cardholders, merchants, and banks, ensuring the authorization, clearing, and settlement of funds. Globally,

• Visa leads with a 52.60% market share,
• Visa is followed by Mastercard at 23.70%.
• American Express holds 19.60%, and
• Discover has 4.00%

2) Electronic Funds Transfer (EFT)

EFTs are instrumental in electronic money transfers. EFT networks operate by using secure, computer-based systems. When a transaction is initiated, the network verifies the details. It facilitates the transfer of funds from one account to another, often in real time or within a few business days.

EFT’s include Automated Clearing House (ACH), which handles bulk transactions like payroll deposits; wire transfers, known for immediate fund transfers often used for high-value or urgent transactions; and the Clearing House Interbank Payments System (CHIPS), which processes large-volume payments between financial institutions. EFTs support direct deposits, bill payments, and large-value transfers.

Internationally, networks like Clearing House Automated Payment System (CHAPS) (for UK-based transactions), Bankers Automated Clearing Services (BACs) in the UK, Single Euro Payments Area (SEPA) in Europe, System for Transfer of Financial Messages (SPFS) in Russia, and Cross-border Interbank Payment System (CIPS) in China play a pivotal role in cross-border transfers, each with its own set of regulations and operating procedures.

3) Peer-to-Peer (P2P) Payment Networks

P2P networks enable individuals to send and receive money directly from one another. Some examples of P2P networks include Venmo, PayPal, and Zelle. Cheques and physical cash are not required to transfer funds via this method.

When a user initiates a payment, the P2P network processes the transaction to debit the sender’s account and credit the recipient’s. This is often done through a simple interface where users can send money using an email address or phone number associated with the recipient’s account.

P2P networks support bank transfers, credit and debit cards, and sometimes even cryptocurrencies. They play a significant role in both business and personal finance by facilitating quick payments for services, splitting bills, or sending gifts, making financial interactions more convenient and accessible.

4) ATM Networks

ATMs provide customers with round-the-clock access to banking services. These networks can be specific to a bank or part of interbank networks. ATMs help with cash withdrawals, deposits, and other banking transactions. Major global ATM networks include PLUS and Cirrus, while regional networks examples include:

• Africa: Interswitch (Nigeria) and SASWITCH (South Africa)
• Asia: National Financial Switch (India) and China UnionPay
• Middle East: Shetab (Iran)
• Europe: Euronet, LINK (UK), and Girocard (Germany).
• North America: Allpoint, MoneyPass, and STAR.
• South America: Banelco (Argentina) and Redeban Multicolor (Colombia).

How Does Payment Network Work?

The typical flow of a payment transaction through a network involves several key steps:

1. Initiation of Transaction

When a customer initiates a transaction, whether online or in-store, the payment network is activated. This process starts with the customer providing payment details, typically through a credit card, debit card, mobile wallet, or other electronic payment methods.

2. Authorization Request

The payment terminal or gateway sends an authorization request to the payment processor, which forwards it to the card network (such as Visa or Mastercard). The card network then routes the request to the issuing bank (the bank that issued the customer’s card) to verify whether the transaction can be approved based on the available funds and other factors like fraud detection.

3. Verification and Approval

The issuing bank checks the cardholder’s account to ensure sufficient funds are available and performs a security check to identify any potential fraudulent activity. If everything is in order, the issuing bank sends an approval code back through the payment network, ultimately reaching the merchant’s payment gateway.

4. Transaction Completion

Once the merchant receives the approval, the transaction is completed, and the customer receives a confirmation, either in the form of a receipt or an on-screen message. At this stage, the funds are placed on hold in the customer’s account but have not yet been transferred to the merchant.

5. Settlement Process

At the end of the business day, the merchant sends a batch of approved transactions to the payment processor for settlement. The payment processor forwards these transactions through the card network to the respective issuing banks. The issuing banks then transfer the funds to the acquiring bank (the merchant’s bank), minus any fees, completing the settlement process.

6. Fund Transfer

Finally, the acquiring bank deposits the funds into the merchant’s account, typically within one to two business days, depending on the processing time and the payment network used.

7. Role of Intermediaries

Throughout this process, various intermediaries, such as payment processors, acquirers, and networks, work together to ensure the transaction is secure, compliant with regulations, and processed in a timely manner.

Benefits of Payment Networks

1. Convenience and Speed

Payment networks streamline transactions, offering instant processing and easy access to funds, which are crucial for consumers and businesses today.

2. Security Measures

These networks employ advanced encryption and fraud detection algorithms to safeguard sensitive financial data, providing peace of mind for all parties involved.

3. Wider Reach and Acceptance

Payment networks facilitate global commerce by being widely accepted both online and in physical stores, expanding the market reach for businesses and shopping options for consumers.

4. Economies of Scale

By processing a high volume of transactions, networks can achieve cost efficiencies, leading to lower transaction fees.

5. Innovation

Payment networks continually develop new technologies and services to enhance the user experience.

Challenges and Risks of Payment Networks

Fraud and Security Threats

Payment networks are constantly under threat from cybercriminals seeking to exploit vulnerabilities. These threats include:

• Data breaches: Exposing sensitive customer information.
• Unauthorized transactions: Fraudulent use of stolen payment credentials.
• Chargebacks: Disputes over transaction legitimacy that can harm merchants.

To mitigate these risks, payment networks employ advanced security measures such as encryption, tokenization, and fraud detection systems.

Transaction Fees

Payment networks generate revenue through transaction fees charged to merchants. These fees can impact the profitability of businesses, especially small merchants. The balance between providing value-added services and maintaining reasonable fees is a critical challenge for payment networks.

Regulatory Compliance

Payment networks operate within a complex regulatory environment, subject to rules and regulations from multiple jurisdictions. Compliance with anti-money laundering (AML), counter-terrorism financing (CTF), and data privacy laws is essential. Staying updated with evolving regulations is a significant challenge for payment network operators.

The Future of Payment Networks

Payment networks are undergoing rapid transformation, driven by technological advancements and changing consumer preferences.

Contactless Payments

The rise of contactless payments, enabled by Near Field Communication (NFC) technology, has revolutionized the payment landscape. This method offers speed, convenience, and enhanced security by eliminating the need for physical contact. A study by Mastercard found that contactless payments grew by 40% in 2022, indicating a strong consumer preference for this payment method.

Mobile Payments and Digital Wallets

Mobile devices have become ubiquitous payment platforms, with digital wallets offering secure and convenient storage of payment information. According to a report by Statista, the global mobile payment volume is projected to reach $3 trillion by 2025.

Open Banking and API Integration

Open banking initiatives are breaking down traditional banking silos, allowing third-party providers to access customer financial data with consent. This fosters innovation and competition, leading to new payment products and services.

Central Bank Digital Currencies (CBDCs)

The emergence of Central Bank Digital Currencies (CBDCs) has the potential to reshape the global payment landscape. These digital currencies, issued by central banks, could offer greater efficiency, financial inclusion, and control over monetary policy. While still in its early stages, countries like China and Bahamas are at the forefront of CBDC development.

These trends collectively shape the future of payment networks, promising faster, more secure, and inclusive payment experiences for consumers and businesses alike.

Conclusion

Payment networks are the backbone of financial transactions. They connect individuals, businesses, and institutions worldwide. With various types of networks, such as credit card, EFT, P2P, and ATM networks, each offering unique functions and benefits, businesses must choose wisely based on their needs. Remember, as technology evolves, the future of payment networks promises even greater convenience, security, and innovation.

Frequently Asked Questions (FAQs)

1. What is an example of a payment network?

Visa and Mastercard are prime examples of payment networks facilitating electronic funds transfers worldwide, connecting financial institutions, merchants, and consumers.

2. What is the role of a payment network?

A payment network acts as a bridge, enabling transactions between buyers and sellers by processing payments and ensuring secure fund transfers.

3. Is UPI a payment network?

Yes, the Unified Payments Interface (UPI) is a payment network in India that allows instant money transfers and merchant payments via mobile.

4. How do payment networks ensure the security of financial transactions?

Payment networks protect transactions using multiple layers of security, including tokenisation, real-time monitoring, and secure authentication protocols.

5. What types of transactions are facilitated by payment networks?

They handle various transactions, including point-of-sale purchases, online shopping, bill payments, and peer-to-peer transfers.

6. Are there any fees associated with using payment networks?

Yes, payment networks may charge fees for their services, including transaction, merchant, or currency conversion fees.

7. Can payment networks accommodate international transactions?

Payment networks are designed to support cross-border transactions, enabling global trade and commerce.

Chargeback vs Refund: Key Differences

The table below highlights the key differences between refund and chargeback –

By understanding these differences, you can implement strategies to reduce the occurrence of both types of instances. It protects your bottom line and preserves your reputation.

Examples of Refunds and Chargebacks

Refund Example:

A customer purchases a pair of shoes online but finds them to be the wrong size upon receiving the order. They contact the retailer to request a return and refund. The retailer issues a refund to the customer’s original payment method, and the customer receives a credit or the money back in their account.

Chargeback Example:

A customer’s credit card is fraudulently used to make a purchase. The cardholder disputes the transaction with their bank, initiating a chargeback. The merchant must provide evidence to the bank to prove the legitimacy of the transaction. If the merchant is unable to provide sufficient proof, the chargeback is approved, and the funds are returned to the customer’s account, while the merchant incurs fees and potential penalties.

How Do Refunds Work?

Card refund requests can arise from various scenarios. A customer might purchase an item that doesn’t match its description or fails to meet expectations. Sometimes, accidental purchases occur, or a customer might be double-charged due to a technical glitch. 

Here are the steps involved in the refund process –

Refund request

The customer contacts the merchant to request a refund, usually citing a reason such as product return, order cancellation, or purchase error.

Merchant verification

The merchant verifies the purchase and the reason for the refund.

Refund initiation

The merchant processes the refund through the payment gateway or directly to the customer’s payment method.

Refund processing

The payment processor or bank credits the refunded amount back to the customer’s account. Usually within 5-10 working days.

Read More: Why Do Refunds Take Time to Reach Customers?

How do Chargebacks Work?

Chargebacks can stem from unauthorized use of a card, dissatisfaction with a product or service, billing errors, or non-delivery of goods.

The chargeback process often involves the following steps:

Dispute initiation

The cardholder contacts their bank to dispute a transaction, citing reasons such as unauthorized use, merchandise not received, or item not as described.

Investigation

The issuing bank investigates the claim and may request additional information from the merchant.

Chargeback issuance

If the bank finds the dispute valid, a chargeback is issued, reversing the funds from the merchant’s account to the cardholder’s account.

Merchant response

The merchant has a limited time to dispute the chargeback by providing evidence to support the transaction.

Resolution

The issuing bank reviews the evidence and makes a final decision, either upholding or reversing the chargeback.

It’s important to note that chargebacks can have significant financial and reputational consequences for businesses. Therefore, implementing robust fraud prevention measures and providing excellent customer service are crucial to minimizing the risk of chargebacks.

Read More: Chargeback Mitigation: 5 Best Practices to Reduce Fraud

Which is More Profitable for Merchants: Chargebacks or Refunds?

Both chargebacks and refunds arise from customer dissatisfaction, yet they carry distinct implications for merchants. When evaluating which option is more beneficial, you must weigh several factors, including financial impact, customer relations, and operational efficiency.

Usually, refunds are considered better for merchants, owing to the following reasons –

1. Speed and Cost-Effectiveness

Refunds are faster and cheaper than chargebacks. They allow you to handle the dispute directly with the customer without involving the bank or the payment processor. This reduces the fees and penalties you have to pay for chargebacks. The process of raising a grievance is usually mentioned on the merchant website under the section Dispute Resolution Guide.

2. Control Over the Process and Flexibility in Offering Alternatives

Refunds allow you the opportunity to offer alternatives, such as exchanges, credits, or discounts to the customer. This way, you can save sales and maintain a healthy relationship with the customer, which could lead to repeat purchases and referrals.

Chargebacks, on the other hand, have several disadvantages. You have little or no say in the outcome, and they are more expensive and time-consuming than refunds. You need to pay fines and administrative costs, in addition to losing the product and the revenue from the sale. Chargebacks can also tarnish your credibility.

3. Customer Retention

Customers who receive refunds are more likely to shop again and recommend you to others. 

To avoid chargebacks, you can use chargeback prevention alerts and notifications from credit card networks or third-party services informing you of a pending chargeback. You can contact the customer and offer a refund before the chargeback is finalized.

You can also use tools to issue automatic refunds based on predefined criteria, such as the amount, product, or reason for refund.

When to Choose a Chargeback Over a Refund (and Vice Versa)

Understanding when to pursue a chargeback or request a refund is essential for both consumers and businesses.

Guidelines for Consumers

Choose a chargeback when:

• You believe a transaction is fraudulent.
• You did not receive the purchased goods or services.
• The product or service is significantly different from what was advertised.
• You have attempted to resolve the issue with the merchant but received no satisfactory response.

Request a refund when:

• You are dissatisfied with a product or service but believe the merchant will resolve the issue without dispute.
• The merchant offers a clear return or exchange policy.
• You have a good relationship with the merchant and expect a positive resolution.

Advice for Businesses

• Prioritize refunds: Strive to resolve customer issues promptly and amicably through refunds to prevent chargebacks.
• Implement strong fraud prevention: Detect and prevent fraudulent transactions to minimize chargeback risks.
• Clearly communicate return policies: Ensure customers understand the terms and conditions for returns and refunds.
• Dispute unjustified chargebacks: If a chargeback is unjustified, gather evidence to support your case and contest the chargeback.

By understanding the nuances between chargebacks and refunds, both consumers and businesses can make informed decisions and protect their interests.

What Are Double Refund Chargebacks?

Double refund chargebacks occur when both the cardholder and the merchant are involved in a disputed transaction.

For example, a customer may request a refund for a product or service they are unsatisfied with. While you may agree to process the refund, the customer may still contact their card issuer to initiate a chargeback, claiming that they did not receive the product or that it was defective/fraudulent. This results in you losing both the refund amount and the chargeback amount, as well as paying chargeback fees to the acquirer.

You may also have to face higher processing rates, penalties, or even merchant account termination if you exceed the acceptable chargeback ratio set by the acquirer or card network.

To prevent double refund chargebacks, you can take some proactive measures, such as:

• Provide prompt refunds to minimize the chance of customer dissatisfaction and chargeback requests.
• Inform customers about the refund processing times and policies, and send confirmation e-mails or messages when the refund is completed.

10 Steps Merchants Can Take to Prevent Both Refunds and Chargebacks

Both refunds and chargebacks can hurt your reputation, revenue, and cash flow. Therefore, it is essential to take proactive steps to prevent them.

1. Quality Control

Ensure that the products you sell are of high quality. Provide a warranty or guarantee to assure customers of your quality standards.

2. Accurate Product Descriptions

Provide detailed descriptions of the products on your website and other channels. Include all the relevant information, such as features, specifications, dimensions, materials, and instructions. Avoid exaggerating or misleading claims.

3. High-Quality Images

Use high-quality images that showcase your products from different angles. If possible, allow customers to zoom in.

4. In-Depth FAQs

Create a comprehensive FAQ section on your website. Include information about your shipping, delivery, return policy, and refund and chargeback policies and procedures.

5. Rapid Response

Use multiple channels to respond to the queries, complaints, and feedback of your customers. Be quick and professional. 

6. Proper Handling

Carefully handle your products and pack them properly to prevent damage or loss during transit. Use reliable and reputable shipping and delivery services.

7. Easy Cancellations

 Allow customers to cancel their orders easily and without any hassle or penalty. Provide clear and simple instructions on how to process the cancellation promptly.

8. Upfront Information

Provide your customers with all the necessary information before they complete their purchase. Inform them of the total cost of their order, including any taxes, fees, or shipping charges. 

9. Exception Indicators

Verify your customer’s identity and payment methods. Use CVV, AVS, 3D Secure, and other security features to reduce the risk of unauthorized or disputed charges. 

9. Chargeback Alerts

Subscribe to a chargeback alert service that notifies you of any chargeback requests or disputes initiated by your customers or their banks.

Legal Implications of Chargebacks and Refunds

Consumer Rights

Indian consumers are protected under the Consumer Protection Act, 2019 which provides for rights such as right to safety, right to be informed, right to choose, right to be heard, right to seek redressal, right to consumer education, and right to healthy environment. In the context of chargebacks and refunds, the Act empowers consumers to seek redressal for unfair trade practices and defective goods or services.   

Merchant Obligations

Merchants in India are bound by the provisions of the Consumer Protection Act, 2019 and Payment and Settlement Systems Act, 2007 to ensure fair business practices. They are obligated to provide accurate product information, clear return and refund policies, and timely resolution of customer disputes. Non-compliance with these laws can lead to penalties and reputational damage.

Note: It is crucial to consult with legal experts for specific advice related to chargebacks and refunds, as laws and regulations may vary and evolve over time.

Frequently Asked Questions (FAQs)

1. Is a chargeback the same as a refund?

A chargeback is a bank-initiated reversal of a credit card transaction, usually after the cardholder disputes the charge. A refund is a merchant-led repayment to the customer, usually when dissatisfied with the product or service.

2. What is an example of a chargeback?

When a customer claims they did not authorize a purchase on their credit card or did not receive the goods or services they paid for.

3. Can I refund after a chargeback?

A refund after a chargeback is possible but not recommended. This is because it can result in a double refund chargeback, where the customer receives both the chargeback and the refund. You will lose twice the amount of the original transaction.

4. Can merchants challenge or dispute a chargeback?

You can challenge or dispute a chargeback if you have evidence that the charge was valid and authorized or that you fulfilled your obligations to the customer. 

5. What are the potential costs associated with chargebacks for merchants?

Loss of revenue, chargeback fees, increased processing fees, higher risk of account termination, and damage to reputation and customer loyalty.

6. Are chargebacks and refunds applicable to both credit and debit card transactions?

Yes, but there are some differences. Credit card transactions are more prone to chargebacks, and customers have more rights and protections under the card network’s rules. Debit card transactions are similar to cash transactions. The funds are deducted directly from the customer’s bank account. Therefore, customers have less time and fewer options to dispute a debit card transaction.

7. In what scenarios would a seller typically offer a refund voluntarily?

A seller would typically offer a refund voluntarily in scenarios where the customer is unhappy with the product or service, the seller made a mistake, or the seller failed to deliver on their promise.

8. How does the timeline for processing a chargeback differ from that of a refund?

The timeline for processing a chargeback differs from a refund depending on the card network, the bank, and the merchant. Generally, a refund is faster and simpler than a chargeback, as it involves only the merchant and the customer. 

9. Why Did I Receive a Chargeback Instead of a Refund?

You might receive a chargeback instead of a refund if the customer disputes the transaction with their bank, rather than requesting a refund directly from you. Chargebacks are often initiated when the customer is unsatisfied with the resolution or finds it difficult to obtain a refund. They involve a more formal process and can impact the merchant’s account more significantly than a standard refund.

Notification about the dispute

We will notify you by email/dashboard about the dispute, mentioning the payment ID and the reason for chargeback, if provided by the bank.

Review the chargeback

• In order to represent the chargeback, review the chargeback and explain to us the chain of events that took place.
• In case the goods/services have not been provided, review the issue and let us know if the customer is willing to accept the goods/services.
• In case the goods/services have been provided, share the proof of deliveries, invoices, any other authorized proof of product/service delivery.
• In case of a duplicate payment made, let us know so we can ask the bank to refund the amount back to the cardholder.

Chargeback phases and TurnAround Time (TAT)

Chargeback documents

For the chargeback you have received, share all documents as per the requirement of the bank with us. We will represent the dispute on your behalf. 

Banks generally provide a window of 3 Business days to represent the chargebacks. Failure to do so within the specified window will increase the number of chargebacks lost by you.

Click here to view the list of documents

How to respond disputes/chargebacks via Razorpay Dispute Dashboard?

To provide you a seamless experience, we have moved all dispute management correspondence to the Razorpay dashboard. Henceforth, responses received via email will not be considered.

 Click here to know how to respond to chargebacks on the Razorpay Dashboard. 

You can click on the below to perform the following actions:

• View Disputes
• Accept Disputes
• Contest Disputes Using Dashboard

Features of Dispute dashboard

• Provides comprehensive dispute management, merchants can view, accept, and contest disputes and chargebacks directly from the dashboard.
• Merchants receive real-time notifications for chargebacks and disputes. 
• It is a one stop solution, centralized platform simplifies the process of managing disputes by providing all necessary information in one place.
• The need for managing disputes via email is eliminated. 
• For a seamless chargeback experience , merchants can integrate the dashboard with their systems by using Razorpay’s Dispute API’s.

Benefits of Dispute dashboard

• The dashboard allows merchants to easily review the status of chargeback reversals.
• The dashboard provides tools to help merchants resolve reconciliation issues.
• The faster resolution on the TAT for closing the chargebacks.

How to avoid Chargebacks?

As mentioned above, most of the chargeback cases come up due to miscommunication between the buyer and the seller. 

Here are a few tips that you can keep in mind to avoid chargebacks.

• Transparent Return Policy: Making sure the return policies are clearly mentioned on the website
• Constant & Clear Communication: Keep customers updated regarding the status of their order
• Proofs of Delivery: Share tracking numbers, invoices and all other order related docs and references with your customers

Chargebacks on International Transactions 

Cross-border e-commerce can be a great way to boost sales and widen your reach to new markets and prospective buyers. But it also comes with risks related to transaction fraud,  identity theft fraud & fraud related to misuse of policies among other risks.  Therefore, every business that is looking to expand business across the border, needs to be aware upfront about what it is up against. Businesses usually cite cross-border payments fraud as one of their major concerns. 

Following is the elaboration on some of the key areas to be aware about and to remember before starting to accept cross border business:  

1. Type of Authentications for International Transactions (3DS Vs Non-3DS) :

3D Secure (3DS) is an additional security step of authentication of the card (as well as the cardholder) that is initiated every time the card not present (CNP) / online transaction is made. It enhances the security measures for both the shoppers and the merchants. The 3DS authentication can happen through various means including but not limited to PIN, One-Time-Passwords, Static passwords among others. On the other side, the Non-3DS transactions are those wherein the card is not authenticated with an additional security of the 3DS. Since the card / cardholder is not verified and authenticated in such a type of transaction, it carries a heightened risk of the transaction being reported as fraudulent or even being charged back. While the participation into the 3DS authentication programs by the card networks is a prerogative of the cardholder and/or the card issuing institution, a well-informed and diligent decision is still to be made by the merchants regarding their participation in cross border card transactions, especially the non-3DS ones. The stakeholders on the acquiring side of the transaction have very limited rights of defending against chargebacks on the non-3DS transactions that are reported as frauds.   

2. What is a Cross Border Transaction chargeback?

An international chargeback is a request made by a cardholder or issuing bank to reverse a transaction that was made using a card instrument (credit , debit or prepaid) that is issued outside of India (International issuance). This request is made when the cardholder disputes the transaction, either because they did not authorize it or because they are dissatisfied with the goods or services they received amongst several other reason codes.

3. How does a Cross Border Transaction differ from a domestic transaction chargeback?

An international chargeback is a chargeback that involves a transaction made in a different country than the issuing bank. This can be more complex than a domestic chargeback because it involves currency conversion and may involve different laws and regulations applicable to the country of merchant/Cardholder/Delivery destination.

4. How do I prevent International Payment Transaction chargebacks?

There are several steps you can take to prevent international chargebacks:

1. Clearly communicate the terms & conditions of the transaction and refunds/returns related to it in a clear and concise way to the cardholder, including the price and any fees or taxes
2. Ensure that the cardholder has authorized the transaction
3. Provide high-quality goods or services that meet the expectations of the cardholder
4. Respond promptly to any customer complaints or disputes

5. How can a merchant resolve an International Transaction chargeback?

If you receive a request for an international chargeback, it is important to respond promptly and provide any relevant documentation to support your case. This may include (but not limited to): 

1. Proof of cross border delivery 
2. Customs clearance copy,
3. Proof of authorization by customer
4. A copy of the terms and conditions of the transaction etc.

If you are unable to resolve the dispute with the cardholder, you may need to seek legal assistance.

Financial Impact

1. In the event that chargebacks remain unaddressed within the stipulated deadline or if insufficient documentation results in chargeback loss, a corresponding amount will be deducted or adjusted from the merchant. 
2. Additionally, any fees and penalties imposed by the networks relevant to the chargeback stage will be recovered from the merchant.

Fees & Penalties for Dispute Stages

You are requested to keep a regular track of ever evolving guidelines of digital payment acceptance. Please make a note of the following table associated with fees and penalties. Your acknowledgement of the same is deemed: 

*Note- Visa has updated the Arbitration Penalty fees from $500 to $600. The change in arbitration fee will be effective from 01st October 24 onwards.

Deduct at Onset (DAO)

When the dispute is initiated, Razorpay will deduct the disputed amount from the merchant’s account. In the meantime, until the chargeback gets resolved, this deduction covers future liabilities. This process is usually followed by the payment gateway to guarantee that there is enough money to cover any disputed transactions and to adhere to legal and regulatory standards. The funds that are/were withheld is returned to the merchant’s account after the chargeback concludes in the merchant’s favor. 

Contact Information

You can reach out to the Chargebacks Team via email id chargebacks@razorpay.com for any chargeback related queries.

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