First things first: you need to understand how payment transactions work. When we talk of payment transactions, we refer to two major cycles or functions: authorization and capture.
When a customer swipes or enters his card number, an authorization request is then sent to his issuing bank to check if his credit account is open, in good standing, and has sufficient funds to complete the transaction. If the card meets all these parameters, the issuing bank then places a hold on the account’s funds for the transaction amount.
After a successful authorization has been completed, you (as the merchant) will then need to perform a capture to proceed with the transaction and transfer the funds from the customer’s bank account to your merchant bank account. Again, capturing should be done daily and by you, the merchant.
Now, how does a void, refund, and reversal fit into the transaction process?
Basically, a void happens when you cancel a transaction before it settles through a customer’s card account. A void can only occur when the payment transaction has only gone through the authorization process but has not yet been captured.
When a void is processed, the transaction is cleared from the terminal before settlement, so the money won’t move from the customer’s card account and the transaction won’t appear on the customer’s account statement. It may, however, appear as a pending transaction on the cardholder’s online statement for 3 to 5 business days until the hold on the customer’s funds has been dropped and the cancellation process is complete.
While the transaction will not appear on the cardholder’s account, there is still a hold on his funds within a certain period of time. This is why in some cases, a void still poses an inconvenience to a customer since he could not access those funds for other purposes. It is also for this purpose that a void would still seem like the money is being ‘returned’ to the customer even if no actual transfer of funds happened between the two accounts.
Another thing to note is that you can only do a void on the same day the original transaction has been made, which is different from how a refund works.
Unlike void transactions, a refund happens when the transaction has already gone through both the authorization and capture process—meaning the cardholder’s funds were already transferred to your account. When you do a void, you are cancelling a transaction as if it never happened; with a refund, you are actually making a second transaction to undo the first one.
A refund follows the same authorization-capture process when making a purchase, but in reverse. This time, it is actually you, the merchant, who is sending back the funds to the cardholder. The amount is authorized and is captured when the terminal settles, and the cardholder will see the amount in their account within 3 to 5 business days.
The tricky part is that the refund involves the transfer of funds that were already captured and settled. This means that just like all transactions, you are now bound to pay a certain fee associated with the processing of the refund. This usually takes the form of an interchange or transaction fee.
A refund also implies that your customer found something wrong with the product he has purchased and now wants to get his money back. That is why of the three, this is the transaction that will hurt you the most. Not only did you lose a sale, you also have to pay additional charges for returning your customer’s money back to their account.
A reversal, on the other hand, is similar to void. It must also be processed before the transaction is captured like a void. What’s different is that while the transaction is being cleared from the terminal, you are also submitting a reverse authorization request to the cardholder’s bank to remove the hold on the funds so they can still be available for other purchases.
Because of this, the reversal becomes the best option to resolve purchases with errors. However, the reversal is also the method with the most limitations: it requires a terminal that can be programmed to do the process. Moreover, the cardholders’ banks must also have the capability to support reversals, which not all international and smaller banks can do yet.
Another limitation a reversal poses is that it must only occur when the payment transaction has not gone through capture and batch settlement. Otherwise, you will still end up correcting the transaction as a refund.
In business, not all of your purchases will become perfect transactions, and that is why these options are available to help you resolve those mixups. That being said, it is critical to really look for a merchant services provider that can help you set up the software and hardware that support all three transactions and guide you in choosing the best solutions.
Agapay’s business model is simple, and that is to provide our merchants a tailor-fit program that will help their business grow. Learn more about our lean payment solutions and see how we can give you the best value for your investment! Contact us through our website or call us at 800 644 3909.