Authorization reversals are a tool that merchants can use for various reasons, such as to:

• Provide good customer service
• Ensure merchant compliance
• Reduce fraud

First, let’s take a look at exactly what an authorization reversal is, and when it is used. Then, we’ll delve into MasterCard’s recommended best practices for managing authorization reversals.

What is an authorization reversal?

When a financial transaction takes place, there are two parts to the process – “authorization” and “settlement”. These are important terms to know, and they are part of basic credit card terminology.

In the first part of the transaction (the “authorization” process), cardholder funds are held, reducing the customer’s “open-to-buy”. In the second part of the transaction (“settlement”), the funds are actually transferred from the customer’s account to the merchant.

An authorization reversal occurs when a merchant or acquirer reverses the authorization step of the transaction, before settlement has even begun.

Once an authorization reversal request is received, it may take up to 48 hours for the reversal to take place.

When is authorization reversal used?

There are multiple scenarios that call for authorization reversal. These include when:

• The cardholder doesn’t want to complete the transaction, or cancels the transaction.
• The authorization was submitted by mistake, such as a technical error or duplicate request.
• The final settlement amount ended up being less than the amount that was authorized.
• The goods or services required were unavailable.
• Fraud was suspected and the acquirer recommended that the merchant reverse the authorization.

MasterCard best practices

According to MasterCard, there are certain best practices that should be implemented when managing authorization reversals. These are recommendations, enabling merchants to use the authorization reversal process effectively. The best practices include:

• Authorization reversals should only be used when the merchant intends to release a hold of cardholder funds before the settlement process has begun.
• Authorization reversals are not appropriate for use after settlement has occurred. Instead, a purchase refund or return should be authorized offline, once the settlement process for the transaction has been completed and submitted by the merchant.
• Authorization reversals should take place at the earliest possible opportunity after the final settlement amount is known to be different from the original transaction amount. MasterCard’s rules are as follows:
  • In the U.S, for a card-present transaction, merchants must submit a request for authorization reversal within 24 hours of the original authorization. This figure changes to 72 hours for a CNP (card-not-present) transaction.
  • In Europe, merchants must submit all reversals within 24 hours of the transaction being cancelled or completed for a different amount to that which was authorized.
• Data from the original transaction authorization must be included in the authorization reversal request. This is to ensure that the issuing bank can release the hold on the cardholder’s funds. To find out what data is required, contact your acquirer.
• If more than one partial authorization reversal is required, such as when multiple items are cancelled, one at a time, then the reversal should reference the original transaction.
• If more than one authorization was submitted – for example, an initial authorization, and then an incremental increase in the total purchase amount through further authorizations – then the authorization reversal should reference the original transaction and should total the original, plus any amounts added through the incremental adjustments.

In addition to these best practices, Mastercard recommends that you maintain clear communication with your customer at all stages – from the initial authorization, explaining how a hold will be put on their funds, through to the final settlement.

In the event that the transaction amount changes between authorization and settlement, such as when submitting a partial authorization reversal, make sure you let the customer know exactly what the changes are and why they have occurred.

Without communication, a customer may be left confused by the transaction that appears on their statement – leading them to request a chargeback. When this happens, the companies handling credit card chargebacks will perform a refund on the customer’s behalf, which the merchant must then dispute.

Simply informing the customer of any changes in transaction amount is a reliable way to prevent this from happening.

Some example scenarios

Let’s illustrate the authorization reversal process through some real-life scenarios.

Out-of-stock goods

One evening, a loyal customer makes a large purchase on their favorite merchant’s website. They buy five items in one order. The next day, when the merchant is processing the order, it’s discovered that only four items are in stock. Quickly, to ensure customer satisfaction, the merchant contacts the customer to let them know, and requests a partial authorization reversal to deduct the cost of the fifth out-of-stock item, reducing the transaction total to the appropriate amount.

The customer orders twice

A customer reaches the payment page on a merchant’s website. He types in his details and submits the payment.

At the same moment, his phone rings, and he begins to talk to his good friend.

Time passes, and by the time the call has ended, the customer has forgotten that he made the purchase. He goes back onto the merchant’s website, and buys the same item again.

Upon checking his emails, he realizes that he made the same purchase twice and contacts the merchant so that he can cancel one of the purchases.

With online purchases, authorization would have taken place immediately through a credit card processing platform. However, settlement would not yet have occurred, allowing the merchant to reverse one of the transaction authorizations. This would release the hold on customer funds, and only settle one of the payments.

When a transaction takes an unexpected turn between the authorization and settlement stage, authorization reversals are there to remedy the situation. Whether it’s a simple error, or a customer’s change-of-heart, merchants familiar with the authorization reversal process can use it to provide excellent customer service – either fully or partially releasing funds before they have actually left the customer’s account. The reversal process also allows merchants to take a step back if they suspect fraud.