Any merchant who works in customer service or assists with escalations is familiar with the question “where’s my refund?” The standard processing explanation that refunds can take 7-10 days isn’t always accurate, especially in certain use cases. In this blog, we’ll shine a light on a few of these use cases, and share some recommendations on actions you can take ahead of peak shopping (and refund) season. It might seem too early to be thinking about the holiday shopping season, but you know what they say: the early bird catches the worm. Or in this case, the bird who thinks early enough about refund issues and plans accordingly doesn’t face undesirable customer and operational costs.
Visa, Mastercard, and Discover introduced refund authorizations in 2019 and mandated them in 2020 (American Express has not yet mandated them). When these card brands first announced these changes, they hoped refund authorizations would reduce the need for customer contact (i.e. “where’s my refund?!”) by informing issuers and customers when refunds are approved. This open line of communication regarding the status of returns could then reassure concerned customers and prevent them from issuing chargebacks. As an added bonus, this change could also help issuers detect and mitigate return fraud.
To enforce the mandate, card brands can apply compliance fees if merchants submit refunds without approvals. In part two of our review of the Spring 2022 Visa Rule Changes, we also shared that effective October 15, 2022, issuers are required to approve 99% of all refunds (with exceptions for some card products like virtual and prepaid cards). This suggests that there were several issuers that had begun declining so many refunds that a limit had to be placed on the practice.
If you haven’t made changes to start submitting refunds for approval, understanding why an issuer might decline refund authorizations in the first place may help you with defining what to do next.
Issuers may decline refunds or credits when you issue them after the status of the transaction or account changed. If the transaction status changed because of a chargeback, accepting the refund would result in over credit to the customer and duplicate deductions from the merchant account. Alternatively, if the account status changed because of fraud and a new account was opened in its place, refunds applied to the old card will likely fail. In the event a customer’s account is closed due to bad debt and the account moves into collections status, the issuer will always reject the refund authorization. Accepting such a refund would mean recalling the account from the collection agency and adjusting the collection balance.
Issuers may also decline refund authorizations for certain card types—primarily prepaid and virtual cards. When the balance for these card types reaches zero (and no refunds are issued in the next sixty to ninety days) the status of that card account changes to closed. Applying refunds to these accounts creates a lot of work for issuers, including locating the customer to issue a refund check.
When issuers reject your refund authorizations, there are a few actions you can take.
When you obtain authorizations on refunds and credits in real time, you can leverage any declines to create immediate calls to action. For example, if your customer is in front of you, on your site, or using your application, alert them of the failure in real time; you can then collect additional information from the customer and let them know that you’ll need to research the transaction before the funds can be returned. If your customer is not present and the refund authorization is declined, leverage the details to set up a research case and communicate to the customer that the card issuer denied to process the refund.
In some cases, you might not actually owe the customer the money you attempted to refund. It’s possible the original sale was charged back or was a fraudulent purchase (which could be why the issuer refused to accept the refund). We recommend always checking for chargebacks before attempting a refund to another form of payment.
There’s one other good reason you might want to examine your chargebacks: if you settle a refund without an approval code, the refund itself can come back to you as a chargeback. That’s right, it’s possible to get a chargeback on the refund itself.
If you update a customer’s record to list a refund as completed before actually obtaining refund approval, and the issuer then rejects or charges back said refund, then your records will be incorrect. Should the customer later contact your Support team for information about the refund, your support agent will see the return in the record and tell the customer to contact their bank for more information about its whereabouts. This puts the customer in a no-win situation because the bank won’t have any information on this rejected refund and will send the customer back to you. To avoid all this, we recommend adding the approval code to the credit receipt.
When considering what other forms of payment to use to return the customer’s funds, there are risks and limitations to consider. For example, one Mastercard regulation states that if a refund is declined by a different card brand issuer, you can’t then process the refund to a Mastercard.
We also recommend exercising caution when customers claim their card account has been closed or that they didn’t receive the refund as reported on their transaction record. Such claims could be fraudulent. While you obviously want to make this situation as easy for the customer as possible, it’s important to have controls in place to protect your operations from being exploited through social engineering and internal fraud.
If you aren’t yet obtaining refund authorizations and your not sure where to start, here are some questions to consider:
All of these questions represent use cases merchants deal with today. Remember: the impact in terms of total cost of declined, rejected, or charged back refunds is not the amount of the refunds, because that money is still in your merchant account. The cost comes in the form of handling multiple calls, escalations, and alternative refunding processes.
Pagos Solutions is constantly evolving our product features to help our clients and will be adding more refund event activity in the future. Peacock currently provides merchants with key data on refunds, declines, and chargebacks.
In the meantime, we recommend using Parrot to help identify card types and card products when evaluating your declines and chargebacks. Since prepaid, non-reloadable cards do not have an account holder attached to them, using Parrot to identify these card types can help you know when you may need to perform more identity verification. Adding these card type and card product attributes to your monitoring, analysis, and policy development can help optimize operational support that results from payment processing anomalies like declined refunds. Contact us today for more information on how Parrot can help you detect trends.