The refund process
When a customer requests a refund, the refund can go back to the original card used for purchase or to a different card designated by the customer. Here is a quick rundown of the refund process:
- Customer makes a purchase using Card A.
- Customer later decides they want to return the item and get a refund.
- At the time of refund, customer provides Card B details for the refund to be credited to.
- The merchant processes the return and issues the refund to Card B instead of original Card A.
This is a fairly common scenario in retail. Customers may have multiple credit cards or debit cards and the card they used for the original purchase may no longer be active or available. By requesting the refund to go to a different card, it provides convenience to the customer.
Why would a customer request a refund to a different card?
There are a few reasons why a customer may request a refund to go to a different card than the original card used:
- The original card has expired or been lost/stolen – In this case, the customer no longer has access to the original card and needs the refund to go to the new replacement card.
- The original card has been closed – Sometimes customers close credit/debit card accounts. The refund obviously cannot go to a closed account.
- The customer wants to switch rewards points – Credit cards often offer rewards points on spending. By getting the refund to a different loyalty card, customers can maximize points.
- Separating personal and business expenses – Transactions may have been made on a business credit card. Getting the refund credited to a personal card helps keep expenses separate.
- Changing banks or card providers – Customers may have changed banks and switched which accounts they use.
Basically, the key takeaway is customers often have valid reasons for needing refunds to go to an alternate card than the one used to make the purchase. As a merchant, being able to accommodate refunds to a different card provides good flexibility for customers.
Does the merchant need to verify ownership of the card receiving the refund?
Merchants do not usually need to verify the ownership of the card to which the refund is being issued. The key requirements are:
- Confirm the customer requesting the refund is the actual buyer – Typically by confirming order details like name, transaction date, etc.
- Obtain the new card details – Card number, expiry date, CVV if applicable.
- Process refund on merchant account as usual – Just designate the new card details as the destination rather than defaulting to the original card.
There is no need for the merchant to further verify that the customer owns or controls the second card. The onus is on the customer to provide accurate details for the card they want the refund credited to.
However, if the refund seems suspicious or fraudulent, merchants can take additional steps to verify the new card details with the customer, or possibly deny the refund until adequate details are provided. But in most legitimate cases, merchants can simply process the refund to the new card provided without further verification.
How does the process work? Reversing the original charge?
When a refund is issued to a different card, the original charge is not actually reversed or voided. Here is how it works:
- Original charge processed to Card A for $100
- Refund of $100 is issued and deposited to Card B
- The original charge on Card A remains as is and is not cancelled
- Customer now has $100 refunded to Card B, offsetting original charge
The original transaction stays intact and “active” on Card A. A new separate transaction is created to issue the refund payout to Card B. So the net effect is the customer got their money back, just to a different destination. But accounting-wise, two distinct transactions are taking place – the original charge and the refund payout.
Can a charge be reversed if needed?
While rare, there are cases where merchants may need to fully reverse or void the original charge on Card A after a refund has been issued to Card B. This can be done by processing what is called a “chargeback”.
The steps would be:
- Original $100 charge made to Card A
- $100 refunded to Card B
- To reverse the original charge on Card A, a chargeback is processed for $100
- The charge on Card A is cancelled and reversed
- Net result is $100 refunded to Card B only, Card A original charge reversed
Chargebacks allow the merchant to fully void and reverse a prior transaction. But they do incur fees and should only be used when necessary. In most cases, refunds to an alternate card can be processed without needing to reverse the original charge.
Regulations and consumer protections
When it comes to refunds to an alternate card, merchants need to follow certain rules and regulations. Here are some of the key considerations:
- Refund window – Most jurisdictions require merchants allow returns and refunds within a reasonable timeframe, typically 30 days up to a year.
- Consumer disclosure – Merchants need to disclose any valid reasons a refund may be denied or only offered as credit for future purchases.
- Equal refund rights – Card network rules generally prohibit merchants from denying refunds to an alternate card while allowing refunds to original card.
- Cash refunds – Depending on the region, customers paying cash may have the right to receive refunds in cash rather than just as credit.
Having clear refund policies and complying with card network rules is important for merchants to avoid penalties, chargebacks or fines. While fraud is a risk, merchants cannot adopt practices that unfairly inconvenience or refuse refunds to legitimate customers.
Fraud considerations
There are some risks of fraud that merchants need to keep in mind with refunds to alternate cards:
- Stolen card details – Criminals may provide details of a stolen card to get refund payouts.
- Refund hacking – Attackers may buy goods then claim fake refunds over and over to different cards.
- Card testing – Fraudsters may “test” stolen cards with purchases then refunds to verify validity.
- Money laundering – Refunds across cards can be a way to anonymize money trails.
To mitigate risks, merchants can:
- Review for suspicious patterns – Look for the same card or customer requesting multiple refunds.
- Use fraud screening tools – Services like machine learning to identify suspicious traits.
- Limit refund destinations – Only allow refunds to verified user accounts rather than random cards.
- Enforce limits – Restrict number of no-receipt refunds allowed over periods like 30 days.
While refund fraud does happen, merchants should weigh fraud risks against legitimate customer needs. Some key indicators like small purchase amounts, high value items, or back-to-back refund patterns can help identify bad cases without refusing all refunds to alternate cards.
Customer disputes and chargebacks
In some cases, customers may disagree with a refund policy and file disputes or chargebacks over refunds declined to an alternate card. Common scenarios include:
- Original expired card – Merchant refuses to refund to new card.
- Claims policy wasn’t disclosed – Customer states refund rules weren’t clear.
- Inaccessible funds – Foreign cards may not allow transfers from original card.
- Non-reversible charges – Customer cannot get refund from original prepaid or debit card.
To avoid customer disputes, merchants should ensure:
- Clear refund policies – Post policies on website, receipts, etc.
- Evenly applied rules – Don’t arbitrarily refuse some refund requests.
- Notes on why refused – Keep clear records of reasons for any refund denials.
- Make reasonable efforts – If possible, work with customer to find solution before declining refund.
Having well-documented refund policies and evidence of fair conduct can help defend against customer disputes and chargebacks, even if refund to original card cannot be done.
Impacts on accounting and reconciliation
Refunds to alternate cards do add some accounting overhead for merchants to reconcile transactions.
Some impacts include:
- More legwork tying refunds to original purchase – Without automatic linkage in transaction records.
- Refunds appear as net new payouts – Increase scope of payments reconciliation.
- Harder to trace complete order lifecycle – If purchase and refund on different cards.
- May require manual review – To identify and explain unfamiliar payouts on statements.
- Complexity from payment fees – If original payment had fees but refund does not.
To simplify accounting for refunds to alternate cards, merchants can:
- Create clear transaction references – Include order or customer IDs on both purchase and refund.
- Refund same amount including fees – Mirror original payment amount to offset fees.
- Process quickly – Refund promptly before statement reconciliation begins.
- Automate reconciliation – Use software to match refunds to purchases across cards.
While more work than refunding to the original card, proper tracking and reconciliation practices can help merchants manage the accounting complexity. The increased customer satisfaction often makes allowing refunds to alternate cards worth the modest extra effort.
Impact on taxes
Refunding to an alternate card also creates some challenges for sales tax reporting and remittance:
- Refund not tied to original tax payment – Harder to confirm accurate tax was charged originally.
- Potential tax overpayment – Customer may have been charged excess tax if using card registered in another state.
- Amended tax returns may be needed – If incorrect tax collected and remitted to state.
- Audit flags – Refund and original sale in different jurisdictions can raise questions.
Recommended practices for merchants include:
- Note jurisdiction – Record location of both original sale and refund.
- Only refund documented tax paid – Don’t refund unknown amounts if not evidenced.
- Use updated customer address – If location changed since original purchase.
- Issue amended returns promptly – Correct any improper tax remitted before audit.
Keeping thorough payment and address records, and promptly fixing any mistaken tax payments, allows refunds to alternate cards while staying compliant. Sales tax reporting should not on its own deter merchants from offering this increasingly commonplace service.
Should merchants set limits?
Given the potential complexities, is it reasonable for merchants to set some limits on refunds to alternate cards? Possibly, in a few cases:
- High dollar amounts – May warrant extra fraud review or justification.
- Frequent requests from same customer – Could require further verification after a threshold.
- Recently activated cards – Can mandate card be open for 30+ days before use in refund.
- Newly added alternate cards – Limit to cards user profiled for past set period like 6 months.
However, merchants should not impose arbitrary restrictions like:
- Blanket ban on alternate card refunds – Violates card network rules.
- Refusing common situations like expired cards – Overly limits reasonable requests.
- Allowing refunds only to account credit – Forcing store credit causes problems.
Finding a balanced policy – with justified limits in cases of high fraud risks – allows merchants to provide a popular service while also protecting themselves appropriately.
Best practices for merchants
Here are some top recommended practices for merchants to follow when processing refunds to alternate cards:
- Disclose refund policies clearly – On website, receipts, terms of service, etc.
- Review fraud tools to detect abuse – But don’t assume all alternate refunds equal fraud.
- Keep refund window reasonable – 30-90 days from purchase allows flexibility.
- Refund same amount paid – Include taxes, fees, shipping, etc. if applicable.
- Add transaction references – Order IDs, customer IDs, etc. to ease reconciliation.
- Offer refunds evenly – Don’t arbitrarily refuse reasonable alternate card requests.
- Train staff on policies – Ensure friendly, consistent execution.
Adopting best practices allows merchants to offer refunds to alternate cards in a sustainable, customer-friendly manner. The right policies balance convenience, controls, and compliance.
Conclusion
Refunds to alternate cards are a fact of life in modern commerce. Customers have legitimate needs like expired or closed accounts. By adopting fair policies merchants can reap benefits like:
- Increased customer satisfaction – More flexibility and convenience.
- Avoiding disputes and penalties – Honoring card network rules.
- Competitive advantage – Meeting customer expectations.
- Opportunities for engagement – Request can indicate closed account, expired card, etc.
With proper controls for fraud and reconciliation, merchants have little reason to resist this increasingly standard practice. As more commerce occurs online and via mobile apps, the ability to refund to any card will only become more important over time.