Unless you have a no-returns policy, refunds are unavoidable. Even if your goods are in pristine condition, a change of heart can be enough to reverse a purchase decision.
That said, refunds aren’t great for businesses. They represent more than a lost sale; they result in additional credit card processing fees. There are a few reasons for this (some are ethical; others not so much), but luckily you can sometimes bypass the unpleasant processing fees related to refunds altogether.
Credit Card Processing Steps
Numerous parties facilitate each credit card transaction, but the ability to void instead of refund a transaction lies solely in the status of the transaction. The first phase is the authorization phase. During this step, the customer provides payment and signs for the purchase. The agreed-upon funds are put on hold and the business receives a six-digit authorization code. Customers will see these funds in the pending approval sections of their online credit card statements, signifying that the funds are held but not yet withdrawn. If a customer has a sudden change of heart and decides to return the item while it’s still in the authorization stage, the business can simply void the transaction.
The funds are not transferred until the transaction is settled. Businesses tend to settle transactions in batches (usually once each business day). For example, to receive next-day funding, transactions for PayJunction customers are batched and settled daily at 5 p.m. P.T. At that point, the funds are transferred to the business and deposited into its bank account, usually within one business day. Once a transaction has been batched and settled, a refund is required to reverse the purchase.
So why are voids superior to refunds?
In contrast to a refund, a void occurs before any transfer of funds. It doesn’t incur a cost because no service has been provided. Voids also resolve faster than refunds do. Voiding a transaction cancels it as if it never happened; the process takes anywhere from one to three business days to resolve. In contrast, refunds take three to five business days to rectify.
When a refund is your only option, you face fees that vary based on your rate plan and provider.
How Your Rate Plan and Provider Affect Your Refunds
If your business is on Flat or Tiered pricing, you’re not reimbursed any processing fees for refunded transactions. However, if you are on Interchange-plus pricing, you are entitled to a refund of the Interchange fee (the wholesale cost to run a transaction) on refunded transactions. The provider markup that’s levied on top of the Interchange is usually not returned.
So, on Interchange-plus pricing, you’ll receive the bulk of your processing fees back on returns … ideally. Why the caveat? Some providers are unethical and pocket the Interchange on returns. There’s an assumption that customers don’t know they’re entitled to this reimbursement, so they won’t notice its absence.
Additionally, many providers charge an authorization fee when processing refunds. It should be a small fee applied to each refunded transaction (though some providers charge excessive fees on refunds).
Furthermore, any refunds should be subtracted from the total processing volume for the month, by which all fees are calculated. Some providers fail to do this. So, in summary, here are all the ways you could pay for a refund that you could avoid with a void instead:
- Interchange not refunded (if on Interchange-Plus pricing)
- Withheld provider markup
- No fees reimbursed (if on a Tiered or Flat rate plan)
- Inflated monthly volume (if refunds aren’t subtracted out)
- Authorization fees on refunds
Of course, not all of these issues will pop up, but any one of them individually or in combination amounts to money that’s not in your account. Do your business a favor and only resort to refunds as a last resort to minimize your potential for lost revenue. Be sure to partner with a provider that doesn’t engage in any unethical billing practices.
Does your business issue a lot of refunds? Were you aware that these fees could be incurred? Let us know your thoughts in the comments below.