Online payments have become an integral part of our daily lives due to their convenience and time-saving nature. However, certain scenarios necessitate refunds, and understanding how these reimbursements are handled in the backend is crucial for businesses and consumers alike.

Refunds are a critical aspect of the online shopping experience. A seamless and efficient refund process not only helps maintain customer satisfaction but also builds trust and loyalty towards a brand. When a customer requests a refund, several steps occur behind the scenes to ensure the money is returned to their account. These steps involve multiple stakeholders, including the merchant, the payment gateway, and the customer’s bank.

This blog post will explore the refund process, shed light on the role of a payment gateway, and address common concerns about why refunds can sometimes take longer than expected.

What is the ripple effect of delayed refunds?

With online commerce returns of ~30%, a simple, straightforward return process can be the key differentiator between businesses with a loyal customer base and those with a majority of one-time users.
Studies show that 91% of consumers believe that the ease of returns/ refunds affects their decision to shop with a merchant again - this is 91% of the users who may potentially churn due to a negative refund experience!

When a customer purchases a product or a service, they expect a promise of a timely refund if they are not satisfied. The unsatisfactory experience of the product/service is already a sub-par experience.

Moreover, if the refund is delayed, it can lead to frustration and dissatisfaction for the customer which can impact the business much more than just a lost customer.

Here’s how delayed refunds impact customer loyalty:

• Loss of Trust: Delayed refunds can be perceived by the customers as a brand’s inability to fulfil its promise to the customer, a threat to brand perception. For example, if a refund is promised within 5 days but the refunds take more than 10 days, customers can feel that the brand is not trustworthy.

• Negative Publicity: Customers share negative experiences much more as compared to positive experiences. Similarly, customers who experience delayed refunds are likely to share their negative experience in their social group via word-of-mouth and extended group via social media channels. This can lead to significant reputation damage. The customer has the option to raise a dispute regarding the payment if the refund is not promptly credited back to them. If multiple disputes of this nature occur, it may result in the freezing of operations with the Payment Gateway.

• Decreased Customer Loyalty: Delayed refunds can also reduce customer loyalty. Customers who are not satisfied with the refund process may not attempt more purchases from the same brand and would switch to a competitor brand.

Why do timely refunds matter to customers?

Purchase of a product or service by a customer is to fulfil an underlying requirement. Initiating a return request is an indication that the product or service is currently unable to meet the original requirement.

Once a refund request is created, customer journey can proceed on one of the 2 paths:

• Refund amount is needed to fulfill the underlying requirement: Customers with limited financial resources will only be able to place another order when the first amount is refunded back to them. This also becomes a point of resentment for the customers as their demand is still not fulfilled and their financial resource is not available with them. This is a potential loss for the brand/ service provider too since the fresh order that the user might have placed is delayed or might not even come due to delayed refund.

• Refund amount is needed to close the transaction: Delay in refunds can lead to an anxious state for the customer which can result in Loss of Trust and ultimately customer churn. Refunds might be needed in case :
  Customers changed their minds: Customers changed their minds about fulfilling the underlying requirement and no longer need the product/ service.
  Customers creates a 2nd order: Customers order a better fit product/service in a separate order and are primarily looking for refund.

What are typical customer expectations in case of refunds?

In the age of 10-minute delivery, customers expect to get everything “right now” including their refunds. Some of the key customer expectations when it comes to refunds are:

• Instant money transfer: Customers expect to receive their refund amount promptly after cancelling an order or as soon as the order is picked up. They anticipate the funds to be credited back to their chosen Financial Instrument (FI), typically the same one used for making the payment

• Faster refund timelines: In some cases where the funds cannot be refunded instantaneously, customers expect specific ETA from the brands that are First Time Right (FTR). A precise ETA builds user confidence and allows them to plan their future orders and financial resources effectively

• Proactive Communications: Customers expect proactive communication regarding refund initiation as well as updates about refund progress. Customers also expect that any delays in refunds should be proactively communicated to them with the new ETA

• Status tracking for an in-progress refund: An anxious customer usually seeks information about the current status of their refund. They anticipate receiving the Unique Reference Number (URN) from the merchants, as well as details about the portal where they can track the refund's progress. This is similar to how customers track the progress of their e-commerce order

What are the current issues for refunds processing?

Merchants face different issues while processing refunds based on the mode of initial payment and assuming the refund will be on the same mode except for CoD orders. Most merchants rely on PG rails to process refunds, which is often a time-consuming procedure and fails to meet customer requirements.

Let's thoroughly examine some of the significant issues with refunds that negatively impact customer experience.

What are the problems with refunds for orders placed, with respect to all collection modes?

• PG rails have no visibility regarding Credit to end-customers. They only have visibility till the refund request is accepted by the acquiring bank. Thus they are not able to share status updates of refunds with merchants due to which merchants are not able to communicate refund ETA to the customers. As a workaround, merchants share a generic refund TAT of 3-5 days response to any customer queries. This leads to situations where merchants claim that a refund has been credited, but the end user has not received the amount in their financial institution. This issue is significant because it highlights a discrepancy between the communication from the merchant and the confirmation of credit received by customers. Acceptance of the refund by the acquiring bank is just the first leg of the multi-hop refund process

• Refunds beyond 6 months (180 days depending on Card/ UPI) are not supported.
• For some refunds, the acquiring bank is not able to accept refunds via APIs. Such refunds have to be initiated manually on Portals or emails leading to further delays.
• PSPs such as Paytm and PayPal are not supported for refunds.

Credit Card/ Debit Card

• Normal refunds via PG Rails have a very high TAT of 5-7 days followed by most of the card networks. Acquiring banks can take as high as 8 hours to just accept the refund request from the PG
• Merchants are not able to share details about progress of refunds with the customers
• An alternate method for merchants to process quicker refunds is to use the Instant Refunds stack available with PG. However, Instant refunds have a few limitations:Cost of Instant refunds is high for brands, Instant refunds are only applicable for VISA card network (both credit and debit), for other card networks refunds might take 7-10 days. Instant refunds are not supported for recurring payments. For example, If a membership fee is deducted on CC by mistake, it cannot be refunded via Instant Refunds

UPI

• The TAT for refunds on UPI of the customer is 2-5 days post refund initiation from the merchant. Even though UPI payments are instantaneous, the refund can take much longer
• Some of the Banking Partners do not support API based refund initiations. Refunds through such banking partners have to be initiated manually which leads to an increased TAT
• Merchants are not able to share details about progress of refunds with the customers. Due to this, delays in processing of payouts are perceived as delay in initiation of payouts by the merchants which leads to decrease in brand value

Net Banking

• The refund for payments done via Net Banking can take 5-7 days. The TAT for refunding payments received via Net Banking channels is the highest among major payment modes (excluding CoD).
• There are no APIs for refunds available for most Net Banking payment modes. Any refunds initiated are adjusted within the claim file sent to the partner bank. The partner bank is then informed to deduct the amount from the settlement and initiate the refund process for the end customer. This is an operational overhead for the merchant and can also lead to incorrect payouts due to manual errors
• Payment Aggregators do not have the bank account details of the customer, they completely rely on the PG rails for refunding back the collected amount

CoD

• Payment Aggregators currently do not provide an end-to-end Cash on Delivery (CoD) refunds solution due to the unavailability of incoming payment details. Therefore, these refunds cannot be processed using the standard refund mechanism offered by Payment Aggregators
• Refunds can be processed through IMPS/ NEFT or UPI; However, this process can lead to complications when a particular payment mode is not supported by the customers bank account. For example, issues may arise when attempting to process refunds through an unsupported IMPS mode.

Most brands currently refund the payments via either of the following mechanisms:

• Payout Links: The customer enters their bank account/ UPI details to redeem the refund amount from the link. The customer might be hesitant to enter the financial instrument details on a webpage. The redemption rates are between 50% - 70%, this leads to some customers not getting back the payment amount in time
• Collecting bank account/ UPI details and initiating payouts: In this scenarios, the merchants have to collect financial instrument details from the customers. The financial instrument data has to be stored safely and this is a major risk for the merchants
• Refunding the payment as store credits: Some merchants have the option to refund the amount as store credits if the customer is opting for this. Not all the customers prefer store credits due to the low liquidity of funds. The customer might feel that the amount will be stuck with the merchant and will be limited to certain purchases. Providing just store credit as refund option is not compliant. Only bigger players like Amazon, FK, Myntra etc. are able to invest in tech to create wallets.

How to manage refunds cycle, end-to-end?

After this deep dive into how refunds are a sensitive factor for any merchant, you’d agree that a seamless and efficient refund process is critical for maintaining customer satisfaction and loyalty.

By understanding the refund process, businesses can address the key pain points and improve their procedures to meet customer expectations. How’s that done? Stay tuned for Part #2 of our guide, where we will dive deeper into managing refunds end-to-end with minimal bandwidth.