What Is The Difference Between Refunds And Voids?
One key distinction that new (as well as old) business owners should be aware of on their merchant account is that there are two different ways to cancel a recently processed sale, and that the two have clear distinctions. While a refund & a void both accomplish the same task in the end (nullifying a payment from a customer), their effects are not the same, and a void is always the more preferred method of the two. We’ll explain why in detail below!
Credit Card and Echeck Refunds
All merchants are familiar with the concept of a “refund.” A refund can be processed on a merchant account against a previously processed sale. There are a few items to be aware of when issuing a refund though:
- The customer’s card issuing bank can take from 3-7 business days to credit the funds back to your customer (time varies by the card issuing bank). You should state this to the customer when issuing the refund, so that they are not upset when they don’t see the credited amount on their online statement the very next day.
- Your merchant account provider (processing bank) typically charges the discount rate % on all refunds as well as the original sale (effectively, you pay the discount rate twice; once on the sale, and again on the refund).
- A merchant with a high percentage of refunds will be considered higher risk. Generally, 5% is the threshold that merchants should remain under for their refund percentages compared to sales. Of course, refunds are always preferred over chargebacks, but high refund ratios often point to a problem in the merchant’s advertising practices or product fulfillment.
Voids on Credit Card and Echeck Transactions
Voids are the ideal method to cancel a recently processed sale, but their is a time-limit: you can only void a sale before that sale settles in the settlement batch at the end of each day. Once a sale transaction settles, you can no longer void it, you must refund it. The benefits of a void (as opposed to a refund) include:
- The customer is never actually charged, so it does not take 3-7 business days for the funds to be credited back to their account (the customer may see a “pending authorization” on their card for several business days, but this will eventually expire & fall off of their card).
- The merchant will not be charged the discount rate on the sale nor the refund!
- If you have a reserve on your higher risk merchant account, voiding a sale will prevent the reserve holdback % from being collected from the settled transaction, which can benefit your cash flow (reserve percentages are not credited back on refunded transactions).
In summary, always issue a void as opposed to a refund whenever possible, as the void clearly benefits both the consumer and the merchant. However, there is a short window available to issue the void, so its important to catch billing errors or process customer refund requests as quickly as possible. Most payment gateways will not offer the void functionality once the sale transaction has settled (in Durango’s payment gateway, the void button will be “grayed out”).
If you have any other questions regarding voids & refunds, or merchant account issues in general, and had to google your answer because your sales rep is too hard to get ahold of, try contacting Durango for a free proposal! Our merchant accounts come with dedicated account managers with years of experience and a deep understanding of the payment processing industry.
