How Do Refunds Work? How to Do a Refund on a Card Machine

Refunds are a crucial aspect of running a business, directly affecting customer satisfaction, compliance and your bottom line. While they can feel like they take a hit on your revenue, handling them well reassures customers that your company is safe and reliable.

In the UK, consumer law requires refunds in most cases, and shoppers expect them to be swift and hassle-free. To keep business operations streamlined, customers happy and to avoid fraud, it’s vital to understand how the refund process works.

In this guide, we’ll explore what refunds are, how they work on point of sale (POS) systems and why managing them effectively protects your business.

What Is a Refund — and Why It Matters to Your Business

A refund is the amount of money that a merchant returns to a customer after a previous purchase, typically due to a faulty item or dissatisfaction with the product or service. While it’s often confused with chargebacks and rebates, it’s important to note that these are different.

A chargeback is a transaction reversal that often occurs after a customer disputes the validity of a card transaction with the card issuer. On the other hand, a rebate is a money-back incentive, or partial retroactive refund, that only occurs if the customer takes a desired action, such as filling out a survey.

According to the Consumer Rights Act 2015, businesses in the UK are required to offer refunds to customers in most cases. In addition to legal requirements, offering refunds is a significant factor in building trust with customers, and fostering loyalty.

Many customers in the UK expect to be refunded promptly, and over half of online shoppers won’t buy again from a retailer if it’s slow to refund their money after a return.

How Refunds Work

Let’s take a closer look at how refunds work, covering the different types, their typical processing times and the associated costs.

Types and timelines

There are several common refund types. How long refunds take depends on the company, situation and original payment method.

• Card payments (debit/credit): Funds are returned to the card used for the original purchase. It takes three-to-five working days in most cases.
• Digital wallets (such as Apple Pay or Google Pay): Funds are sent back to the payment method that’s linked to the wallet. These take three-to-14 working days, depending on the customer’s bank, the merchant and the digital wallet used.
• Cash refunds: The customer receives an instant cash refund. Many modern POS systems enable merchants to record and manage cash payments, eliminating the need to track transactions manually.
• Bank transfers: Funds are sent to the customer’s bank account. They take three-to–10 working days, depending on the banks and merchants involved. As bank transfers are often irreversible, it’s important to refund the correct amount and select the right transaction on the POS.
• Buy-Now-Pay-Later (BNPL): The merchant processes the return as normal and sends the refund request to the BNPL provider. This takes three-to-10 working days, depending on which BNPL provider you use, the banks involved and the merchant processing time.

Costs

In most cases, POS systems don’t charge merchants for processing refunds but will retain the transaction fees from the original purchase. However, it’s important to note that some providers charge a ‘refund fee’.

As a result, when you’re deciding on the best POS systems to use, ask the vendor about any refund fees, as these extra costs can dent your margins.

The Processes Involved in a POS Refund: Step-by-Step

POS refunds involve frontend and backend processes. We outline the steps below:

Frontend process:

1. The customer requests a refund, and you verify its legitimacy.
2. If the refund is valid, log in to your POS system terminal or app.
3. Locate the original sale, select the correct transaction from the search results and choose the item to be refunded from the transaction.
4. Select the original payment method in the system or app. For example, for card refunds, ask the customer to swipe, tap or insert the card they used to make the initial purchase.
5. The refund request is then sent through your payment processor.
6. The POS prints out a refund receipt to confirm the funds have been returned, and both your business and your customer get a copy.
7. The refund appears on your next settlement report.

Backend process:

1. Once you initiate a refund, your payment processor notifies the network of the card used, whether it’s Visa, Mastercard or another provider.
2. Your business bank account is debited for the refund amount.
3. Your bank sends the refund transaction through the card network back to the customer’s bank, where it’s applied to the proper account. The customer may not see the funds in their account for a few working days.

Outlier scenarios:

It’s also important to be aware of these outlier situations:

• Card not present: When a card isn’t present, a business must manually refund the amount in the system. The card details needed for a refund include the card number, expiry date, customer name, billing address and security code.
• Over the phone: When issuing a refund over the phone, you typically need to collect the card information, the reason for the refund and proof of purchase, to verify that the customer actually made the purchase in the first place.
• Online: For online purchases, locate the transaction in the system, initiate a refund, provide a reason and select the original payment method. Notify the customer when the refund is complete.

Establishing a Refund Policy

Since UK businesses are legally required to provide refunds in certain scenarios, such as if goods are faulty or not as described, it’s sensible to establish a refund policy. A transparent policy ensures customers know your rules, and may reduce the chances of chargebacks and other disputes.

In addition to being important for compliance, a refund policy also provides potential customers with peace of mind. A survey of UK consumers found that 84% of them preview return and refund policies before making a purchase. As a result, it’s important to know how to write a refund policy.

When writing a small business refund policy, include the following:

• The timeframe for returns and refunds.
• The conditions you set. For example, to be considered valid, a refund must be accompanied by the original receipt, and the product must be unused.
• The refund methods you offer. These could include the original payment method, exchanges, store credit, or gift cards.
• Details about your small business no-refund policy, which outlines what’s exempt from refunds, such as personalised items, perishable goods or items with a broken health seal.

Your return policy should be prominently displayed on your website, on receipts and on signage in your store.

How To Execute Refunds Smoothly in Your Day-to-Day

Issuing refunds is a common practice for businesses, so it’s essential to do it seamlessly. First, ensure your staff are trained to process returns on your POS and have a good understanding of your refund policies.

Also, be prepared to handle challenging or fraudulent refund requests. Refund fraud saw UK retailers losing around £11.3bn in 2023 alone.

Always keep detailed records to prevent being taken advantage of. This includes having a clear refund policy, using fraud prevention software or requiring more information (such as receipt photos) before approving refunds. In some cases, adding a fee for returns may also deter fraudulent requests.

Maintaining clear records is also crucial for accounting and compliance purposes, as unkempt records may lead to issues when filing tax returns and, potentially, result in penalties or fines.

Finally, choose the right POS for your needs. This means selecting a system that works well for your industry and business type, ensuring you can handle refunds and all other transactions without issue.

Key Refund Features of POS Systems

Speaking of the “right” POS system, there are several features to evaluate and consider before deciding which platform suits your business needs:

• Look for quick refund processing for the best customer experience. Ask the vendor about refund processing times for debit cards, contactless refunds and other methods.
• Demo the platform. Is it intuitive and easy to use? The more user-friendly, the faster and more efficiently your team can work.
• How well will the tool integrate with your accounting software? Automating data flow reduces the amount of manual work your team must do.
• Does it offer robust reporting features? These will enable you to monitor refunds and track any trends or other insights.
• What are the costs and fees associated with refunds? Is the transaction fee returned to you after a refund?
• For customer experience, does the system offer fast transactions, accept multiple payment methods or offer loyalty programs?

Leading POS Systems in the UK

Here’s a breakdown of the refund features of the leading POS systems in the UK.