Reversal vs. Refund: What's the Difference and Why It Matters?

As a business owner, you've likely encountered those moments when a customer's card payment seems to vanish from their account, or you've handled a return that takes days to process. While both scenarios end with the customer getting their money back, they involve two distinct payment operations: a reversal and a refund. 

Understanding the difference is crucial for your business. It's not just about managing financial processes efficiently; it's about building customer trust. A quick reversal in case of a payment issue shows you care about their experience and are proactive in minimizing their stress over blocked funds. On the other hand, an efficient refund process, when necessary, demonstrates your professionalism and reliability.

Reversal (Authorization Reversal)

Reversal is an operation performed to cancel an authorization hold on funds before the transaction has been finally processed and settled by the bank. In this process, the original transaction is simply reversed, as if it never existed. 

Think of an authorization as a temporary reservation of funds on your account—the bank ensures the money is available but hasn't yet sent it to the merchant. A reversal is simply the act of canceling this reservation. Because of this, the funds are released back to your account almost instantly, with no need to wait for a formal return of money.

When does a reversal occur?

• Terminal error: A card payment was approved in a store, but the terminal lost its network connection before the transaction could be finally sent for settlement. The merchant can immediately perform a reversal, releasing the blocked funds on your card.

• Customer changes their mind: Right after the payment authorization, a customer decides not to purchase the item. The merchant can immediately perform a reversal, releasing the blocked funds.

• Connection issues: During an online payment, the authorization is successful, but the internet connection drops before the merchant can confirm the transaction. After a short period, the payment system automatically performs an authorization reversal.

Refund

Refund is an entirely different story. This operation occurs after the money has already reached the merchant, and the transaction has been settled and posted. At this point, the business must send the money back to the customer.

In this case, the merchant does not reverse the original transaction. Instead, they generate a new transaction for the returned funds. On the customer's bank statement, this is recorded as a separate transaction—unlike a reversal, which makes the original transaction disappear. Because the money has to physically travel back from the merchant to the customer, the entire process can take up to several business days.

When does a refund occur?

• Product return: A customer decides to return an item a few days after making the purchase, and the payment has already been posted to the merchant's account. The business performs a refund for the amount of the original transaction, and the funds are returned to the customer's account as a separate entry.

  
  

Verestro’s Solution for E-commerce Refunds

For e-commerce merchants, managing refunds—typically initiated after a transaction is settled and posted, requiring a new return transaction—can pose both operational and financial challenges. Traditional money-back refunds are not only time-consuming but also expensive, often straining a merchant’s cash flow. Verestro addresses this issue with an innovative, cost-free alternative: issuing virtual gift cards to customers in place of standard cash refunds. This modern approach not only reduces the high costs tied to conventional returns but also opens the door for merchants to drive future sales and revenue through subsequent purchases made with these virtual gift cards.

Summary of Differences

Feature	Reversal	Refund
When it happens?	Before the transaction is finally settled (authorization)	After the transaction is settled and posted
What happens to the transaction?	It is reversed as if it never existed	A new return transaction is created
Visibility on the account	The original transaction disappears	A new, separate refund transaction appears
Timeframe	Almost instantaneous	Up to several business days