Online shopping may be easy, but refunding or returning stuff? That’s a whole different journey. This complexity can be likened to a passenger deciding to reverse their journey after entering a subway system.
When a shopper decides to return an item, they initiate a financial transaction that is a reversal of the original. In this analogy, the shopper is like a subway rider, the retailer is the destination station, and the banks along with payment networks such as Visa or Mastercard represent the subway system that facilitates the transaction.
When a refund is issued, just like retracing steps in a subway, every step of the transaction needs to be reversed. However, the costs associated with the initial transaction—such as interchange fees and processing fees—aren’t always fully recoverable in the refund process. These fees are akin to the subway fare, which you pay upon entry and isn’t refunded if you choose not to complete your journey.
Retailers often absorb these costs. When a product is returned, not only does the retailer lose the revenue from that sale, but they also incur transaction fees which may not be fully refundable. This is similar to a subway system that has already provided service up to the point of reversal; the service cannot be undone without incurring some cost. Consequently, these operational costs may lead retailers to increase prices, implement stricter return policies, such as shorter return windows or restocking fees, and reduce customer perks such as free shipping or promotional discounts.
Understanding these dynamics is essential for retailers to manage returns effectively and sustainably. Like strategic subway travelers who plan their routes to avoid unnecessary costs, retailers can benefit from carefully reviewing and possibly revising their return policies to manage costs better. Implementing clear policies and communicating them effectively to customers can help reduce the frequency and financial impact of returns.
As financial technology evolves, like the introduction of open banking, the process of handling returns could become more efficient by directly linking consumer bank accounts with retailers for quicker refunds. This advancement could potentially reduce the number of intermediaries involved, lowering the costs associated with returns.
Open banking’s potential to streamline refunds, cut costs, and enhance customer experience puts legacy acquirers under pressure to innovate. Direct bank-to-bank communication bypasses traditional card networks, promising lower fees for businesses. Moreover, open banking’s near-instant refund capability significantly outpaces legacy methods, improving customer satisfaction and boosting retailers’ cash flow. Additionally, the technology’s potential for reducing fraud and offering richer customer data for marketing and analytics provides further incentives for retailers to explore these solutions.
I am a Finance Director, Why Should I Care about Refunds?
Unfortunately, it’s not unheard of for merchants to lose out on the refund fees owed to them, especially in scenarios where transaction volumes are high. This can occur due to errors within complex accounting systems, a lack of granular oversight, or potentially less scrupulous practices on the part of processors. In some regrettable cases, an acquiring bank might fail to notify the retailer of significant refund fees they’re entitled to, leaving the retailer completely unaware of the missing revenue.
Conversely, some processors might have internal policies against refunding smaller businesses for waht they deem as “minor” refunds (for example, those under 100 euros), yes it is true! The cumulative impact of these losses can be significant, directly impacting profits of small family run retailers. Merchants, both those dealing with high volumes or frequent returns, should therefore consider investing in robust oversight mechanisms. This could involve hiring professional accountants, building capable in-house finance teams, or even utilizing AI-based systems designed to monitor transactions, identify discrepancies, and automatically flag any missing refund fees. While these measures represent an additional cost, proactively preventing revenue leakage may often be a much wiser return on investment than simply accepting such unethical losses.
What about open banking?
Legacy acquirers face increasing pressure to adapt or risk losing market share. If they can’t provide merchants with comparable speeds, lower costs, and the potential for innovation that open banking offers, customer dissatisfaction and missed opportunities will likely mount.
There are some legacy acquiring companies that maintain refund fees against the merchant as much as 1,30 EURO per transaction in their publicly advertised schedules of pricings.
While open banking won’t displace legacy acquirers overnight, it presents a welcoming challenge to their traditional operating models. Those who embrace these changes and provide merchants with competitive open banking solutions or principles will likely have the best chance of succeeding in the long run.
Retailers, particulalry tier 1 and 2, who understand and actively manage the intricacies of the return process are better positioned to maintain profitability while offering customer-friendly return policies. This awareness can lead to more informed decision-making, ultimately benefiting both the business and its customers.
Disclaimer: This website is for informational purposes only. It is not a substitute for professional legal or financial advice. Always seek guidance from qualified experts before making decisions.
