Voided transactions occur across virtually all industries. However, void transactions and refunds at software-as-a-service and other subscription-based organizations are slightly different. Although frequently used, the two terms – void transactions and refunds – are sometimes misinterpreted. Additionally, there are subsequent questions that are typically asked, like:
- When should a payment be voided?
- When should a refund be issued?
- How can a payment management system reduce (or help prevent) void transactions?
Let’s clear up void transactions and refund misconceptions, as well as answer the most common questions about these processes.
Voided Transactions and Refunds: What They Are and How They’re Different
While both involve reversing a sale, voids are usually simpler and less-time consuming since they prevent the transaction from being completed (posted). Refunds, however, require more processing time and effort. This affects the business’s revenue and accounting processes, as well as the customer’s available funds.
As described by Investopedia, a void transaction is a debit or credit card transaction that is canceled by the SaaS company before it is settled by the cardholder’s bank and the organization receives payment. Once voided, the transaction shows up on the customer’s account as a pending transaction, which basically is a hold on the money that can last anywhere from 24 hours to several days.
Initiated by the customer or the SaaS business, a refund reverses a transaction after it’s been posted. The funds that were transferred from the customer’s account via a debit or credit card, are returned to the customer’s account. When the customer requests a subscription refund, it can quickly and easily be handled through the company’s payment gateway.
Let’s look at each of these processes in a bit more detail.
Void Transactions
Typically initiated by the company, a void transaction cancels the payment before it’s settled with the business’s payment provider. When a transaction is voided, the company doesn’t pay credit card processing fees, nor will the customer be charged for the purchase.
The only stipulations are that the transaction can only be voided after it has been authorized, but before it reaches the settlement process. Once the transaction has been settled, the only course of action is issuing a refund.
Why void transactions occur
There are several reasons you might need to void a transaction, including:
- Order entry errors: During the configure, price, quote (CQP) process, salespeople may select the wrong product, configures it incorrectly, or enter the wrong dollar amount. The transaction must be voided to ensure the customer receives exactly what they want.
- Incorrect transaction details: Similar to the bullet above, it also entails discrepancies in the customer’s details.
- Customer request: Customers may change their mind about the purchase or the payment method used – sometimes mere minutes later. It’s best to void the transaction to avoid additional finance team effort or a chargeback in the future.
- Duplicate transactions: If the transaction is processed more than once (whether from human error or a technical issue), the duplicate transaction must be voided to avoid charging the customer multiple times for the same purchase.
- Ordered product(s) not available: If a customer orders and pays for a product that’s out of stock or unavailable, you may opt to void the transaction.
- Suspected or confirmed fraud: If a transaction gets flagged as fraudulent or suspected of being fraudulent, voiding the transaction mitigates financial risk. While encompassing more than only fraudulent transactions, laws such as the Fair Credit Billing Act (FCBA) protects customers from fraudulent credit card charges. If a transaction is deemed fraudulent, the customer has the right to have the transaction voided and not be held financially liable for the purchase.
To illustrate a void transaction, say a customer signed up for your premium Business+ software solution for 25 users. Once the transaction took place, the customer realized they needed seats for 35 users. As long as the transaction hasn’t posted, you should void the transaction and process a new one for 35 users.
Transaction Refunds
Sometimes mistaken for void transactions, refunds are issued after the transaction has settled and the organization has received payment. Unlike void transactions, which are fairly straightforward and quickly handled, refunds occur once the transaction has passed through the customer’s account to the SaaS company’s account, making the process more time and effort intensive.
Why refunds occur
Like void transactions, refunds occur for a variety of reasons, including:
- Customer dissatisfaction: Although the product or service may be working as intended, the company may opt to refund the purchase price to build and retain trust. Some of the most common reasons for customer dissatisfaction include:
- The product itself
- Support
- Product features
- Pricing
- Product performance
- Quality
- Reliability
- Security or privacy
- Better price: The customer found the same product at a better price from a competitor.
- Product is no longer needed: This may occur for a number of reasons, including product usage delays.
- Fraudulent activity: A refund may be requested to launder money from a stolen credit or debit card.
At a high level, refunds are typically provided for three reasons – product returns, customer dissatisfaction and billing disputes.
Previously, we mentioned the term chargeback. While similar to a refund, a chargeback (or reverse transaction) occurs either willingly by the company or forced on them by the customer or the debit/credit card issuer.
The Effects of Void Transactions on Accounting
The department within your organization most affected by void transactions is finance. Here are some best practices you should implement to ease the process, make it less time consuming and ensure the accuracy of financial statements.
Sales reconciliation: Be sure void transactions are accounted for during the sales cycle to ensure sales figures equal money received.
Reporting: To ensure transparency will all financial activities, void transactions need to be included in your accounting systems.
Financial statements: To avoid inflated accounts receivable figures, void transactions must be recorded on financial statements.
Tax reporting: Although void transactions do not contribute to taxable income, they must be accounted for to ensure accurate tax reporting.
Cash flow: Since void transactions do not affect cash flow, they should not be included in cash flow calculations.
Customer records: To build and maintain customer loyalty and trust, it’s important to record void transactions on customer records.
Reducing and Preventing Void Transactions
While void transactions will and do occur, here are some steps you can implement to reduce and, in some cases, prevent void transactions.
- Be transparent with customers: Establish and inform customers of your refund and cancellation policies, including timelines.
- Minimize transaction errors: Put processes and procedures in place to guide your employees through the transaction process, including the entering of all transaction details like correct product codes, product amounts, and customer details.
- Enhance fraud detection practices: Put processes and technology in place to identify potentially fraudulent activities before they happen.
- Keep your payment system up to date: Payment processing systems need to provide reliable and secure transactions, as well as be on the cutting edge of technology to stay a step ahead of fraudsters.
Handle Transactions Quickly, Efficiently, and Securely
By automating processes, BillingPlatform removes billing complexity, while reducing the chance of errors that could result in void transactions. Our state-of-the-art billing system fulfills 100% of all your business requirements, CPQ, usage processing rating, invoicing, payments, collections, customer portal, reporting, analytics, revenue recognition, and A/R subledger – all on a single platform.
With us as your billing partner, you have everything you need to adhere to strict compliance and security standards, such as ASC 606, IFRS 15, SOC1/SOC2, PCI and much more. But don’t take our word for it… The Forrester Wave™ named BillingPlatform as the leader in SaaS Recurring Billing Solutions in 2023. Receiving the highest score possible in nine criteria, including product configuration, usage rating & pricing calculation, configurability & extensibility, and security & reliability, one of the testimonials concluded, “[BillingPlatform] has been able to handle anything we’ve thrown at them” for product and pricing configurations.
That’s just the tip of the iceberg. If you’re ready to learn more about BillingPlatform and how we can help you remove transaction errors and revolutionize your monetization strategy, contact our team today.
