During business operations, there will be times when you need to cancel a transaction and give the money back to your clients. It can either be due to a disagreement, breach of contract, incompetence, illegal actions, impossibility or performance, payment failure, an issue with the bank, or others. That’s why business people also need to know what a void transaction and a refund are.
Both terms are completely different from each other. However, they coexist in the same system, which is why we need to talk about them. First, let’s talk about the stages in a sales process to understand further when these two terms are used.
The Stages of The Sales Process
A sales process has two unique steps. The first step is ‘authorization.’ This process happens in real-time. That means the moment a card is swiped, dipped, or keyed-in, the customer’s issuing bank will be informed immediately. Once that happens, an authorization is generated. The card will either get approval or a decline.
Assuming that it gets approved, the sale is authorized to be processed. Many businesses authorize hundreds to thousands of sales every day. Once authorized, the sale will sit in the terminal/gateway until the end of the day.
The second step is the ‘capture.’ This step will take place at the end of the day when all authorized sales from the day are sent to a merchant service provider for processing. Once a sale is captured, it’s then fully processed, and your business gets paid for the sale. At the same time, your customers will see the funds debited from their associated bank account.
Now that we’ve got that out of the way, let’s now talk about the instance a void happens.
What is a Void Transaction?
Void transactions (according to Investopedia) are canceled transactions by a vendor or merchant before it settles through a customer’s debit or credit card account. When a transaction is void, it doesn’t appear on the customer’s account statement. Instead, it will appear as a pending transaction when the customer checks their account online.
Understanding Void Transactions
A transaction takes place when the merchant swipes the customer’s debit or credit card. If there are sufficient funds in the customer’s account, the terminal/gateway will authorize the transaction. However, it’s not fully settled yet because payment has to be released from the customer’s account to the merchant.
If there are any problems with the transaction, it will become void despite it being settled. When the transaction becomes pending and hasn’t cleared the customer’s account, the sale will be prevented from going through. Thus, a void transaction takes place.
If a customer wants to void a transaction, they’ll need to contact the merchant and request that the transaction be reversed. The merchant can also void a transaction when they notice a mistake or issue at the point of sale.
Once a transaction is voided, it will reflect the customer’s account as a ‘pending transaction.’ After a certain amount of time, it will disappear. The hold can last from 24 to several days, causing inconvenience to the customers since they won’t be able to access the money during that period. That means whether the customer is using a debit or credit card, the funds that they allocated towards that purchase will not be accessible until the hold is lifted.
Void Transaction Special Considerations
1. Voiding Purchases
Fortunately, mistakes can be reverted easily by voiding transactions if they are recognized immediately. For example, a buyer may notice they were charged incorrectly by the merchant. A customer who just paid for the items from a grocery store picks up their bags and realizes that the cashier accidentally included some of the next customer’s items in their purchase. Once that happens, the cashier can then void the transaction, re-scan the correct items, and charge the correct amount to the customer.
Some merchants also allow a timeframe in which customers can cancel a purchase. This instance is pretty common for e-commerce merchants and other online vendors. Most of the time, buyers have the option to cancel a purchase that they made online within 24 hours. Once the purchase order is canceled, the seller will then void the transaction. The buyer will not be charged for the canceled purchase. However, if they are unable to cancel within the allotted timeframe, they will either receive a penalty or the transaction will be completed.
2. Voiding Fraudulent Transactions
Void transactions are also essential in the event of a fraudulent purchase. Nowadays, card-issuing companies have high-end fraud detection systems that automatically flag any fraudulent transaction.
Most companies will put these transactions on hold. The customer will then have to verify whether or not they made the transaction. Once the customer declares that they didn’t make the transaction, the merchant will immediately void it. If the company is unable to reach the customer for purchase verification, the card company will automatically void the transaction.
Any suspicious transaction will be void to ensure the safety and security of the customer. That’s also why making online purchases nowadays requires you to either enter your email address or create an account with the site.
Void Transactions vs Refund
Again, void transactions are different from a refund. However, they can coexist in the same system. Void transactions don’t involve transferring money from the customer’s debit or credit card company to the merchant or vice versa. On the other hand, a refund is issued after a transaction has settled. The customer has already made the payment for the goods and service. Refunds involve the merchant returning the money that the customer paid. The reason could vary differently. It could either be due to dissatisfaction or goods or service or that they changed their mind.
Some vendors and merchants may settle transactions immediately. However, they’ll need to issue a refund policy instead of voiding the transaction. So whether the customer paid via credit card or debit card, they will get their money back.
Unlike void transactions, the process of refunds tends to be longer. In fact, some refunds can take as little as 48 hours or as long as 30 days. Once the refund is complete, the amount that the customer used to pay for the goods or services will reflect back to their account.
As you can see, void transactions and refunds are completely different concepts. However, they can also be incorporated into a merchant’s business operations. Keep in mind that you’ll need to keep your merchant account active to be able to issue void transactions or refunds. The customer’s issuing bank will also play an important role during these processes, especially refunds.