Void Transaction vs Refund: What’s the Difference?

Whether your customers pay with a physical card or pay online, it is important to be able to cancel or reverse a transaction – for example, when an error has been made or if you suspect payment fraud.

Canceling a transaction is called “voiding” the transaction, while reversing a transaction is known as a refund. They both achieve the same end goal – the customer gets their money back – but as a small business owner it’s important to understand the differences and when to use which method.

Issuing a refund when you could have voided a transaction will cost you in unnecessary payment processing fees!

What is a Void Transaction and How Does it Work?

A void transaction invalidates a card payment before it’s settled and finalized by your payment processor, and is initiated by the merchant.

Because credit card payments are typically settled in batches at the end of each day, a transaction can only be voided for a certain amount of time.

The time you have to void a transaction also depends on the payment gateway. If you use the Gravity Direct gateway, for example, you can void within 25 minutes of the transaction.

To ensure success, it’s best to void a transaction as soon as possible after the payment was made.

Here’s how a void transaction works:

• A customer makes a purchase using a credit card or debit card.
• The merchant processes the transaction.
• The customer’s bank places a hold (authorization) on the funds, but they aren’t yet transferred to the merchant – the payment hasn’t been settled yet.
• The merchant and/or the customer realizes a mistake has been made, and they decide to cancel the transaction.
• The merchant locates the transaction on the point-of-sale (POS) system or in their payment processing dashboard, and presses “Void”, “Cancel”, or something similar.
• The customer’s bank removes the hold from the customer’s funds, and the funds are released back to the customer.
• And then it’s like the payment never happened – it won’t appear on the merchant’s or customer’s financial statements, and you won’t be charged payment processing fees for the transaction.
• Voiding a transaction is a good way to avoid chargebacks and the associated costs and headaches.

Common Reasons for Voiding Transactions

Some of the most common reasons for voiding a transaction are:

• A customer is accidentally  charged twice. This can be due to a mistake by the employee operating the credit card terminal, or the result of a technical issue.
• The customer accidentally  paid the wrong amount. This can happen if the employee entered the wrong amount into the terminal and the customer didn’t pay attention when tapping their phone to pay.
• The customer mistakenly paid someone else’s bill. For example, items got mixed up at the checkout line. 
• The item the customer ordered and paid for is out of stock, and can’t be delivered. This can be due to an inventory management issue.
• The customer changed their mind about a purchase, shortly after paying and before the payment settled. The merchant can decide whether or not to honor the customer’s request.
• The payment processor or the credit card company flagged a transaction as potentially fraudulent, and the merchant received a notification to void the transaction.

What is a Refund and How Does it Work?

A refund is when funds are returned to a customer after the transaction has been settled, processing fees have been paid, and the funds are already in the merchant’s account.

Refunds are typically requested by the customer. The merchant has to agree to the refund and transfer the funds back to the customer.

Here’s how a refund works:

• A customer makes a purchase using a credit card or debit card.
• The merchant processes the transaction.
• Enough time passes for the transaction to settle, and the funds are transferred from the customer’s bank account to the merchant account.
• The customer requests a refund – for whatever reason.
• If the merchant agrees, they locate the transaction on the POS system or in their payment processing dashboard, and follow the steps to issue a refund.
• The funds are returned back from the merchant’s account to the customer’s account.

With refunds, both the original transaction and the refund appear separately on the merchant’s and customer’s financial statements. Source