The merchant’s guide to ecommerce refunds

Two arrows pointing in opposite directions with a £ symbol in the middle
author image
Nadja Bennett, Strategic Accounts Director
16 Jan 2024

As UK online sales continue to increase, with transactions amounting to 38% of the nation’s retail industry (£133 billion in sales), customer expectations over refunds are also increasing.  94% of consumers prioritise transparent return costs, while 88% want clear return policies.

It’s increasingly clear that swift and clear refund processing is more than just a convenience to customers — it's a crucial component that shapes their satisfaction, loyalty, and overall lifetime value. 

In this article, we look at the common challenges ecommerce merchants will encounter when processing returns, and what tactics — including emerging alternative payment methods — you can use to offer quicker and more reliable refunds.

Who is this article for?

This article is for anyone who wants to understand more about ecommerce payments. Heads of ecommerce, heads of payments and payment managers in the ecommerce space will find this particularly relevant.

Common challenges in refund processing

The existing systems that merchants use to process refunds present several challenges. These systems can be sluggish and are made more complex because there is often a lot of manual input needed. The end result of this is slow, error-prone and complex refunds.

The time it takes to process refunds is a concern, especially with customers now demanding instantaneous settlements. Waiting periods of up to five days for card and Bacs payments are exasperating for your customers, reducing loyalty and retention. A previous TrueLayer and YouGov study revealed that two-thirds of shoppers consider refund processing time an important factor on whether to shop with your business again.

Existing refund processes come at a higher cost and an increased operational effort for many businesses. Manually tracking and managing multiple payment reports is both inefficient and error prone. This inevitably leads to more complaints from customers whose refunds were delayed or misplaced. A lot of these frustrations will ultimately fall onto your already busy support teams. 

How refunds work using different payment methods

Refunds are different depending on the payment method used. Each method follows a distinct procedure and timeline. 

Remember, the time it takes to process a refund payment is separate from the returns process. The returns process will depend entirely on your brand’s own timelines.

Credit card refunds

When a customer requests a full or partial refund for a credit card payment, the merchant initiates the process by sending the refund request to the acquiring bank. The acquiring bank then validates the refund and forwards it to the credit card network. 

The credit card network facilitates the transfer of funds to the card issuer, which finally credits the refunded amount to the customer's credit card account. This refund can take as many as five business days to settle in the customer's account due to internal bank processing times. Helpfully for consumers, credit card purchases between £100 and £30,000 are protected under the Section 75 Consumer Credit Act.

Debit card refunds

Debit card refunds tend to be processed quicker than credit cards. Unlike credit cards, which involve the credit card issuer paying for the purchase initially and necessitating a refund through the issuer, debit cards operate directly from your bank account. Therefore, refunds via debit cards involve a direct crediting process back to the original account balance. While they can settle more quickly, they can still take up to five business days.

Ecommerce payment insights straight to your inbox
Join 10,000+ subscribers getting the latest advice and news from the world of ecommerce, payments and open banking.

Manual bank transfer refunds

To process refunds via a manual bank transfer, the merchant carries out a direct transfer of funds from their account back to the customer's bank account. This type of refund can actually be instant in some cases. Specifically, it depends on where the merchant is based and which specific payment rails are used to send the refund.

Typical refund times based on specific bank transfer mechanism:

  • Bacs (UK): three days (or five days if submitted on Thursday or Friday)

  • Faster payments (UK): typically within minutes (but can take up to two hours)

  • CHAPS (UK): same day (if sent between 6 am and 6 pm on business days)

  • SEPA Instant (Europe): within ten seconds

  • SEPA Credit Transfer (Europe): typically within one business day

Regardless of the exact mechanism, the process — as the name suggests — is manual. You, as the merchant, need to actively input the consumer’s details and make the transfer. Any manual effort to validate and verify account details will inevitably add to the time.

And while many types of manual bank transfer are free, others — like SEPA Instant — can cost consumers up to €12 depending on the bank and country.

Buy now pay later (BNPL) refunds

Processing refunds for customers who have used BNPL to buy from your brand will vary on the exact BNPL provider, and which underlying payment method they used to complete the purchase. For example, Klarna suggests refunds will take up to 14 days from the time you — the merchant — register a refund. 

Digital wallet refunds

Digital wallets are not all necessarily created equal. There are several types, including staged wallets, container wallets and stored wallets. Refunds times can vary significantly, as the payment method used to fund the wallet could be card, bank account or stored balance. 

The likes of Apple Pay are commonly called container wallets or pass-through wallets. These are simply virtual representations of physical wallets. They let customers access virtual versions of their physical cards. As such, refunds will operate similarly to physical card refunds. 

Staged wallets, like container wallets, do not store funds but are connected to a funding source such as a bank account or payment card. PayPal offers staged wallets, and a refund via PayPal can take anywhere from the same day to two credit card billing cycles.

With stored value wallets, you need to have the account “funded” before any payments can be made. Funds can also be withdrawn to a linked bank account. Paypal and Paysafe offer stored value wallets. 

Instant bank payments (open banking) refunds

With the huge discrepancy in refund settlement times depending on payment method, it can feel almost impossible to reliably promise your customer swift and simple refunds. But instant bank payments (powered by open banking) offer ecommerce merchants a quicker and better way to refund your customers when the need arises.

Instant bank payments, as the name suggests, allow customers to pay for goods, and you receive those funds instantly. To further improve the end-to-end payment journey, open banking payment providers (like TrueLayer) have begun building on top of open banking functionality to enable instant refunds, removing the settlement anxiety — where consumers worry they won’t get their money back. 

Send instant refunds and payouts with TrueLayer

Using the fastest payments rails across the UK and EU and supported by open banking-enabled account verification our instant refunds solution — Payouts — is designed to support scaling and enterprise businesses. Speak to one of our payment experts to understand how Payouts could help your brand offer fast, reliable refunds that help boost customer loyalty.

Upgrade your checkout
See how instant bank payments can help you drive sales, build loyalty and offer a more secure way to pay.