Online Refunds: From Weeks to Seconds

How many times have you waited for a purchase refund to be credited to your bank account to be credited over a week, or 2 weeks at a time?

Slow online refunds can be extremely frustrating for consumers and especially in a market like India, where a lot of shoppers are still skeptical of online commerce. Failed transactions or returning products due to quality issues can be pertinent issues that add to the skepticism of purchase block for consumers.

Moreover, consumers aren’t educated about refund policies and procedures, neither by online businesses nor by the government bodies or financial institutions that oversee the procedures. So to make this simpler for consumers as well as businesses dealing with the refund repentance, we’d like to take you behind the scenes of — Why online refunds take time and how they can be made faster?

The Story in Numbers: Customer Returns and Refunds

In a customer journey, the payment experience is critical.

If the refund cycles are long and tedious, the customer is more apprehensive about your products and offerings. On the other hand, if you issue swift and seamless refunds, this ensures great customer experience and builds trust.

The average refunds window — time period between a merchant initiating a refund to the refund being credited in the customer account — came out to be approximately 7 days, with as many as 23% of the refunds taking more than 10 days. This data does not include the time taken by a merchant to initiate a refund after getting a request from the customer.

Slow refunds also happen to be the largest source of support queries with most e-commerce customer support teams devoting at least 50% of their time to refund related queries.

The industries that see the most cases of returns and refunds are –

  • Travel and Hospitality – About 22% of the orders and purchases end up in a refund request.
  • eCommerce retailers – About 16% of orders are returned due to incorrect descriptions, sizes, poor quality and more.
  • Fashion retailers – About 21% of orders end up being returned and refunds are issued due to incorrect size, poor fabric quality, real-life longevity of the product and more.

These numbers drastically contribute to poor customer experience, when clubbed with the average refund timeline. In a survey by Digital commerce, 72% of customers lose trust in an online retailer if the refunds are credited after 5 days. With only the largest online retailers like Amazon and Flipkart had a clear refund policy, and others still being vague about refunds, customers still have a hard time dealing with online purchases.

So what gives, why are online refunds still causing loss of business in an era where digital transactions are skyrocketing, banking norms are becoming digital-friendly and new technologies like UPI are becoming a norm?

To answer the questions let’s take a look at how online refunds work.

How Are Online Refunds Processed

To understand how online refunds work, it is imperative to first understand how are online payments collected by businesses or individuals.

There are generally 3 parties involved – The customer making the transaction, the payment gateway and the merchant.

The customer makes a transaction through their preferred mode of payment, it can be via net banking, wallet, UPI, debit or credit card. Once the refund is requested by the customer and accepted by the merchant, the merchant initiates a request at the payment gateway. The gateway passes the request to its payment processing partner, a partner bank (acquiring bank) in the case of a card or UPI transaction. The acquiring bank deducts the amount from the next settlement to the gateway and thus effectively, the refunded money is with the acquiring bank now. The acquiring bank identifies the payment mode and forwards it to a network (Visa/Master/Rupay). By this time we have an Acquirer Reference Number to track the refund. The network identifies the issued bank card or ID and validates the details with the customer’s bank (issuing bank) — this is to ensure the refund goes back only to the source of payment and is usually the most time-consuming step. Once confirmed, the refund is adjusted in the settlements of the acquiring bank by the card network and settled to the issuing bank. The issuing bank, in turn, credits the money to the end customer.

All of these exchanges of date happen via daily batch file exchanges defined the protocols of Visanet (by Visa) and Banknet (by Mastercard). For UPI and Rupay transactions, NPCI defines the protocols. Not only does each batch process add a day to the refund timeline, but often banks delay confirmation of a transaction due to reconciliation processes at their end. This explains why certain older public sector banks tend to have slower refunds than the newer private banks.

There are usually 2 scenarios encountered that require a refund in online payments.

Scenario #1 – Amount is debited but the transaction fails on the merchant’s end

Premise – A customer tries to complete a purchase by making an online payment, but the payment gateway or the merchant alerts the customer that the payment has failed. However, the customer receives a transaction alert from their respective bank, that the amount has been debited.

So, what went wrong?

When the information for transaction processing is transferred between the issuing bank and the acquiring bank via the card network, each party — the payment gateway, the acquiring bank, and the card network — keep checking (polling) with the other party for the status of a given transaction.  It may so happen that while the issuing bank (and the card network) confirm the transaction leading to an account debit, the same may not be acknowledged by the acquiring bank (and the payment gateway). The payment gateway polls the acquiring bank and detects the occurrence as a failed transaction, even though the money has been debited by the issuing bank.. 

In most cases, the acquiring bank acknowledges the confirmation after a delay of up to 1 working day, and the same is relayed to the payment gateway. In this case, the payment gateway can choose to accept this as a successful transaction and notify the merchant (and customer) OR it may choose to refund the transaction back to the customer. At Cashfree, the merchant can choose whether they want to accept such delayed confirmations or issue a refund automatically.

In the rare case, the transaction is not acknowledged by the acquiring bank, the customer needs to speak to their issuing bank. Or, the customer has to speak with the merchant, so that the merchant can resolve the issue by initiating a similar conversation via the payment gateway. This should usually happen if the customer doesn’t get a refund for more than 1 week after making the transaction.

Like customer payments, refunds also follow a similar chain of commands to fulfill before the money can be returned to the customer. There are various actions that require human intervention and as much as we would like to believe, these processes cannot be completely automated, which might considerably reduce the refund window. 

Plus, the sheer amount of similar cases per day adds to the timeline of the refund issued especially in a region like India.

Scenario #2 – A  full or partial refund is issued on the request of the customer

Premise –  The customer places an order and successfully transacts for the product or the service. Due to some reason, he or she, later on, decides to cancel the order, and henceforth requests a refund from the merchant.

Merchant can mark refund multiple ways:

  • Call payment gateway’s refund API
  • Mark refund in payments gateway’s dashboard
  • File upload with multiple refunds in one go in payment gateway’s dashboard

In this scenario, the business uses its payment gateway to raise a request to their bank for a refund. The payment gateway acts as an authentication and communication platform between both the issuing and payee bank, to complete the refund process. As there are multiple stakeholders in the transaction, there is a series of manual oversight and authentication required for the transaction to be completed. The entire process at least has 3-4 authentication barriers as well as human interaction which makes the refund process last almost a week and at times more than 10 days.

On top of that, most online businesses do not initiate refunds before the collection of the returned product, which adds to the delay. 

Cash-On-Delivery returns are a different refund process altogether and takes relatively longer. When a customer has to deal with returning products that were bought via COD, most businesses have to request bank account details from their customers, in order to process refunds, and due to the priority given to product collection prior to refund management, the money takes more than a week to reach back to the customer, whereas a purchase takes just a minute to go through.

On top of this, there haven’t been clear regulatory guidelines around processing refunds and protecting the interest of both parties, viz-a-viz, the customer and the business. Due to the lack of guidelines and regulatory bodies overseeing the procedure, different organizations, banks, and payment gateways have a varying set of rules on how to handle failed transactions and refunds and therefore it ends in a poor customer experience, which creates hesitation for the customers to trust a brand again.

Making refunds faster for customers and merchants

Refund processing is complex as we have seen and a significant part of online payment processing. One of the recent developments in refunds is regulatory. 

14 Day Refunds – Centre Proposes New Guideline for e-commerce online Businesses

To protect consumer rights and misuse of private data by online retailers and businesses, the central government wing, Ministry of Consumer Affairs, has proposed a set of new eCommerce guidelines. One of the 2-key highlights of the guideline is to ensure that refunds reach back to the customers in not more than 14-days.

The new proposed regulation is due to be finalized and is currently been shared with national eCommerce firms, bodies, and unions for further discussion and development. This new regulation is slated to be discussed again on September 16 between the ministry and eCommerce bodies on how it would be implemented.

If the proposed regulations go into effect, customers would benefit a lot from –

  • Guaranteed refunds in no less than 14 days after raising a request
  • Additional data handling and protection laws – Encrypting personally identifiable data of consumers
  • Maintaining a level playing field between the eCommerce platform and the seller – Elimination of favoritism, underhanded tactics to promote one seller over the others and so forth.

Solving refunds at Cashfree

At Cashfree, we have been constantly working to bring industry-first payment solutions to improve customer experiences for all kinds of businesses that accept digital or paperless transactions. We’ve always identified refunds as a big problem that needed solving.

Looking at our data of processing more than 100 million transactions, we learned that 17% of customers who have made an online purchase, request refunds.

Interestingly people preferred three modes of refunds over other options –

  • With 52% of the surveyed consumers, preferring IMPS transactions,
  • 30% preferring PayTM reverts,
  • And, the last 18% preferring UPI based refunds.

Last year we had introduced Cashgram. Introduced as a way for businesses to pay users without having to collect account details, Cashgram was built to make issuing refunds a breeze. It takes less than 5 minutes for any user to receive funds via Cashgram once a refund request was approved.

Cashgram was adopted quickly for refunds by many eCommerce companies facing high rates of CoD order returns. As the product grew, a lot of brands showcased the potential of the solution and it grew out to create it’s very own use-cases, that honestly, we didn’t think of.

Cashgram at its core, even today, remains a solution to issue a fast monetary settlement for both businesses and consumers. But it has expanded to –

  • COD Refunds/Returns at E-commerce stores
  • Rewards disbursal on Fantasy Sports/Online Gaming apps
  • Payouts to marketing affiliates
  • Gifting (alternative to gift cards)
  • Disbursals on Peer to Peer lending platform
  • Expense reimbursements

Introducing Cashfree Instant Refunds

Today, Online refunds are a crucial roadblock that needs to be dealt with, if online businesses want to truly thrive in the next phase of eCommerce growth, that’s supposed to reach a market capitalization of $230 billion, or approximately Rs.1,65,000 crores.

At the start of the year we start working on Instant Refunds, and today we are happy to announce that Cashfree Instant Refunds is available to all our customers. 

As the name suggests, Cashfree’s latest offering Instant Refund helps brands reduce the long refund process from one week to a few moments. 

Cashfree’s Instant Refunds can enable merchants to issue customer refunds instantly without any need for manual intervention, making it possible for you to add an automated and instant refund solution to your business. The new offering works with all payment methods available on the payment gateway: 

  • Netbanking
  • Credit and Debit Cards
  • Digital Wallets – PayTM, Amazon Pay and PhonePe
  • UPI

Other instrumental features of Cashfree’s Instant Refund includes –

  • Effortless integrations with various platforms, 3rd party payment gateways and more.
  • ERP and API integration as well as custom solutions for internal products
  • Capability to completely automate the process, reducing manual intervention to bar-minimum.
  • Real-time analytics and reporting on refund status and progress, with Cashfree’s analytics dashboard.
  • eCommerce plugins and support for COD order refunds (Coming Soon)

We are proud to bring you Instant Refunds, a product developed to enable online businesses to improve customer experience and smoothen out the last step crucial to acquiring customers, giving customers complete confidence while making a purchase by providing the facility of instant refunds.

Do check out the product here, or you can directly reach your account manager or sales team to learn more.

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