Rethinking Refunds: Leveraging Technology for Enhanced Efficiency

Just over a year ago, I wrote a blog describing how merchants struggle with an efficient refund process (cfr. "Refunds - A bigger problem than you would imagine" - https://bankloch.blogspot.com/2022/07/refunds-bigger-problem-than-you-would.html). The traditional method of refunding is by sending funds back to the original payment method, but this method is not just costly and complex; at times, it is downright impossible.

This issue was also identified by Jeremy Balkin, a former executive of JP Morgan and now founder and CEO of TodayPay, which offers “Refunds as a Service”, enabling merchants to offer customers instant refunds via multiple payment methods. Examples of their services are "Refund Now, Pay Later", in which TodayPay issues the refund and the merchant has up to 90 days to refund the funds or "Better Refund", offering consumers a cash back in exchange for a refund. This unique service underscores a significant gap in the evolution of payment systems for efficient handling of refunds.

The problem of refunds extends however far beyond the retail and eCommerce world. There are many niche use cases, where consumers are entitled to a refund, but where the link with the original payments is not existing or very hard to find, making the current approach of sending money back through the original payment method impossible.

Some examples are:

Recycling Initiatives, e.g. getting your deposit back (a refund) at festivals for returning glasses or reusable cups or supermarkets and dispensing machines that incentivize recycling by refunding deposits for returned plastic or glass bottles.
Library Late Fees Refund: Some libraries offer refunds for late fees if books are returned in good condition within a grace period.
Rental Equipment: When you rent equipment, like tools, vehicles (e.g. car rental) or supplies (e.g. clothing), you often pay a deposit to cover potential damages. This deposit is refunded when the items are returned on time and in their original condition.
Hotel Incidentals: Hotels often place a hold on your credit card for incidentals when you check in. This is not an actual charge but a temporary hold to cover potential expenses like room service or minibar usage. The hold is released, effectively refunding you, if these services are not utilized.
Parking: parking costs can be reimbursed, if you leave within a certain time frame or can prove a certain consumption (e.g. at a local merchant).
Public Transportation Cards: In many cities, public transportation systems require a deposit for a reusable transit card. When the card is returned, the deposit is refunded.

To navigate the complexities of refunds, especially where direct purchase links are absent, businesses are turning to diverse solutions:

Cash Transactions: Simple and immediate, cash refunds are ideal for straightforward transactions like bottle deposits or event parking.
Card Holds: Hotels, car rental agencies, and similar businesses often hold an amount on a credit or debit card to secure deposits. This involves blocking a certain amount on the customer’s card, which is released (effectively refunding the customer) upon fulfilling service terms.
Digital and Mobile Payments: Digital wallets like PayPal and Apple Pay offer convenient refund options, especially for online transactions.
Prepaid Solutions: Public transport and rental services often use prepaid cards or tokens, with deposits refunded upon service completion.
RFID Technology: Events and festivals use RFID bands for payments and access control, with deposits refunded upon return of the device.
Online Gateways: E-commerce platforms process refunds directly to the original payment method, simplifying online shopping returns.
Direct Bank Transfers: Ideal for larger deposits or when other methods are impractical, ensuring direct and secure refunds.
Vouchers and Credits: Some businesses offer future service credits instead of cash refunds, promoting customer retention.

Looking ahead, the rise of smart contracts promises to redefine refunds, automating them under predefined conditions and further simplifying the process. Another evolution which might simplify the process is SEPA Request-to-Pay (cfr. my blog "SEPA Request-to-pay: a door opener to innovation" - https://bankloch.blogspot.com/2022/06/sepa-request-to-pay-door-opener-to.html)

As refunds are often viewed as a loss activity, very few businesses effectively invest in this, resulting in an inadequate service. However investing in efficient refund processes can significantly reduce costs (by reducing manual actions and the number of customer support calls and enhance customer satisfaction. A smooth refund experience not only minimizes operational hassles but also builds consumer confidence, encouraging repeat business.

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