Tanisha Sabherwal
Tanisha Sabherwal
July 27, 2021

Any successful e-commerce business accredits its success largely to its refunds and return policy. It is an indispensable part of the business. While we as consumers might complain why refund takes so long to process, the backend process is indeed quite extensive.

Refunds are only made on successful transactions.

  1. Full refund: Entire transaction amount is returned.
  2. Partial refund: Only a part of the transaction amount is returned. Multiple partial refunds can be made against the same transaction.

Refund process flow

Refund process flow

There are two means of refunds:

  1. The merchant integrates an API at its end, supported by the payment gateway or PSP.
  2. Marking on the PSP's admin dashboard by the merchant either as a partial or full refund.

A few checks on the refund process:

  1. Refunds should be marked against only successful transactions.
  2. Total refund amount or some of partial refund amounts should not be greater than the transaction amount.
  3. Duplicate refunds should not be processed.
  4. Merchant should have enough settlement amount to adjust the refunded amount.

Refund flow

The order ID for refund is communicated to the aggregator/payment gateway which performs check on the same and forwards a payment ID to the acquiring bank. The acquiring bank receives this payment ID from the payment gateway and forwards it to the issuing bank with its own term Transaction ID or yet another payment ID. This multiple hopping on different accounts take the larger portion of the time after the payment aggregator/gateway has marked it successful.

Depending on the payment method, the the Turn around Time(TAT) for this refund process is decided as under:

  • UPI: Instant or Maximum 2 working days
  • Debit/Credit Card: Minimum 5 working days and Maximum 10 working days
  • Net Banking: Minimum 2 working days and Maximum 10 working days
  • Wallet: Minimum 1 working day or Instant and Maximum 3 working days

Aggregators don't take any charges from the refund process but here is how refunds work for different settlement models:

  1. Upfront deduction model: Merchant loses money because it needs to return the entire amount as the platform takes its PG Charge.
  2. Surcharge model: Consumer loses money as it does not get back the surcharge it paid for the PG charges.
  3. Invoicing model: Merchant loses money.

Case of auto-refund:

Auto refund is where the merchant will ask aggregator to mark the transaction as refund if transaction status is not completed within stipulated time period, say within 15 mins. What if the transaction is changed to success after 30 mins.

From the acquirer's view, the transaction is successful and it will take its cut. Since, this amount is not settled to the merchant, the surcharge will be paid by the aggregator to the acquiring bank.

Resources: Paykun, Razorpay, AuthNCapture