Intro
In order to cancel a card payment, banks (or the payment institution) provide three different methods to reverse the main transaction. Those are: the refund, the cancel, and the charge-back methods1. Do you know what is the differences between them? Do not worry. I’ll explain them as simply and as widely as possible in this post.
Although these three methods have meaningfully different in their consequences, they often seem like the same thing from the customers’ perspective. As a hands-on experienced fintech developer, I should say that not only the last consumers but also many of merchants and even thousands of banking professionals have misconceptions about them.
Within the exceptions, there is always only one suitable method available for reversing a payment that depends on the status of the main payment. Let’s say: you purchased something, or you are the merchant and sold something but somehow you need to pay/get the payment back. You can find the best option for your case at the end of this post. But before that, let’s define these three methods.
The Cancel Method
As it means “Canceling” is basically just canceling the main payment and related order. This method can be considered as deleting the main payment transaction records from the merchant accounting, the issuer and the acquirer bank (maybe also the intermediary institutions if exist).
As a general rule, the main payment disappears from the customer bank account once it is canceled, just like never happened.
Usually, the cancel method is available only for the payments accomplished on the same day and only before the day report (z-report). The cancel method has to be called before accounting process. That is why there is a time restriction both for banks and merchants to use this method.
The Refund Method
A refund is a method that can be defined as paying back to the customer for a payment that was accomplished and also already accounted for by the banks.
The refund method is usually initiated by the merchant in cases of product refunds, exchanges, or an order cancelation after the same day. The customer and the banks also can be able to initiate a refund process in some cases. But this depends on the country legislations (financial regulations), the situation of the payment, the ability of the payment service providers e.t.c.
The technical difference between the cancel and the refund method is that: the refund creates a second record with a negative amount on the issuer and/or acquirer databases, while the cancel method simply deletes the records. In a nutshell; the refund process will appear on the customer account with the related (main) payment process.
As the cancel method has a time range restriction, the refund method has too.
The ChargeBack Method
Unlike the cancel and refund methods, the Charge-Back is often utilized for unauthorized payments and unreconciled statuses. This method can be considered as bypassing the merchant by the customers when they could not solve the dispute.
The chargeback is usually triggered by the customer and usually initiates an inspection process by related banks. The merchant may be expected to proof the order is authorized by the customer, and submit some solid evidence like invoices, signatures, shipment records e.t.c.
In many cases like wide-size cyber-crimes, data leakages, ordering frauds e.t.c. issuer/acquirer banks, card networks, or payment service providers can requests mass chargeback processes. In addition,
The chargeback is usually triggered by the customer and usually initiates an inspection process by related banks. The merchant may be expected to proof the order is authorized by the customer, and submit some solid evidence like invoices, signatures, shipment records e.t.c.
In many cases like wide-size cyber-crimes, data leakages, ordering frauds e.t.c. issuer/acquirer banks, card networks, or payment service providers can request mass chargeback processes. In addition to these, regulations of almost all countries state that the courts can order chargebacks to banks.
Case Examples
| Case | Solution |
| A customer paid a mistyped amount and noticed it on the same day. | The merchant can CANCEL it. The customer can pay it again with the correct amount. |
| A customer wanted to exchange a product two days later. | The merchant can REFUND it. |
| A customer requests a refund but the merchant declines it. | The customer can request a CHARGEBACK |
| One credit card has been stolen and used unauthorized. | The customer/bank can initiate a CHARGEBACK |
| All credit card data have been leaked from a hacked bank and used unauthorized. | The bank/CC network/Court can run mass CHARGEBACK(s) |
The financial consequences of these methods are also different for the merchant and the customer
| Customer Cost | Merchant Cost | |
| CANCELED | Pays nothing | No transaction fee |
| REFUNDED | Gets a refund of the same amount | Processing fee (+ refund transaction fee) |
| CHARGEBACK | Gets a refund of the same amount / Pays nothing as canceled | Processing fee (+ refund transaction fee) + (Chargeback fee/penalty) |
Notes
1.) There are a lot of reverse payment methods like “partial refund”