The distinction costs you real money. A reversal cancels an authorisation before settlement: no funds move, no fee is charged. A refund corrects a settled transaction: the processing fee is gone and stays gone. Treat every cancellation as a refund and you absorb fees you never had to pay. On Stripe’s UK rate of 1.5% + 20p, that is £1.70 you lose on every £100 order you should have voided instead.
Refunds vs Reversals at a Glance
| Aspect | Refund | Reversal |
|---|---|---|
| When it applies | Payment has already been captured and settled | Authorisation not yet captured; funds not yet moved |
| Cash flow impact | Real cash movement: deducted from next payout | None: no money moved |
| Fee implications | Processing fee from the original transaction is not returned | Zero: no capture, no fee |
| Customer experience | Refund credit appears 5–10 business days after issue | Pending charge disappears once the bank releases the hold |
| Accounting entry | Two entries: original sale debit and refund credit, plus fee loss | No entry needed: the original auth never settled |
| Risk of chargeback | If refund is delayed, cardholder may raise a dispute before it arrives | None: no settled transaction to dispute |
| Stripe fee on £100 transaction | £1.70 lost (1.5% + 20p not returned) | £0.00 |
Reverse where you can; refund where you must. A reversal sits pre-settlement and costs nothing. A refund sits post-settlement and the processing fee stays with the acquirer. If you process more than a few hundred orders a month, building your cancellation workflow to catch transactions before settlement pays back inside a quarter.
What Is a Refund?
A refund is a second transaction. The acquirer sends a new credit from your merchant account back to the cardholder’s account, and that credit is completely separate from the original payment. Your customer’s statement ends up showing both lines: the original debit, and days later, the credit.
How a refund works
When you click the refund button in your gateway dashboard (or fire Stripe’s Refund.create from your API), the gateway raises a fresh credit transaction and sends it back through the card scheme to the customer’s bank. Stripe says the customer sees the credit approximately 5 to 10 business days later, depending on the bank.
That gap shows up in your inbox. The customer who cancelled on Monday and still sees nothing on their card by Wednesday lunchtime tends to ring the shop or fire off an angry email asking where their money is. A reversal does not generate that ticket. The pending charge just disappears from the customer’s app, often before they think to check.
Timeline and fees
You do not get the original processing fee back. Stripe’s published policy is explicit on this point: the fee stays with Stripe once a refund goes through, though a refund issued shortly after the charge can go through as a reversal, with no fee withheld. On a £200 refund at 1.5% + 20p, that is £3.20 gone. On a £50 refund, 95p. Run 200 refunds a month at an £80 average order value and you are quietly bleeding around £280 a month in unrecovered processing fees, before you count the time your team spends fielding the “where’s my money” calls.
Bank-held merchant accounts vary. Worldpay and Barclaycard Payments do not publish how a refund treats the fee, so we make no assumption either way. If you are on a blended rate with a payfac like Stripe or Square, budget for the fee to be lost.
Who initiates a refund
You issue refunds on your own initiative. That is what separates them from chargebacks, which are raised by the cardholder through their bank. The practical point: if the customer emails you first and you refund within a day, you keep control of the timing and avoid the dispute process altogether. If the customer skips you and rings their bank instead, you are looking at a chargeback and (on Stripe) a £20 dispute fee whether you win, lose, or draw.
What Is a Reversal?
A reversal (also called a void, a cancellation, or an authorisation release) cancels a payment authorisation before the funds are captured. No money has moved. No settlement entry exists. The reversal tells the card scheme to release the hold on the cardholder’s funds, and that is the end of it.
Authorisation reversal
When a card payment is authorised, the issuing bank ringfences the funds on the cardholder’s available balance. That hold stays in place until you capture the payment or the authorisation expires. An authorisation reversal (a void) sends a message back through the scheme telling the issuing bank to drop the hold straight away. How fast the pending charge disappears from the cardholder’s app depends on the issuing bank.
The bit that matters for you: no fee is charged. No capture means no interchange, no scheme fee, no acquirer margin. The transaction costs you nothing to cancel.
Chargeback: the third mechanism
A chargeback is not a refund and not a reversal. It is a forced transaction correction the cardholder initiates through their bank under Visa or Mastercard dispute rules. It lands after settlement, outside your control, and you find out about it when the funds disappear from your next payout. Stripe says the full dispute process can take 2 to 3 months. Each chargeback carries a £20 dispute fee on Stripe, win or lose, and pushes up the chargeback ratio that triggers account monitoring. We mention them here because the most common way a refundable situation becomes a chargeback is the merchant taking three days to respond to the customer’s first email.
Credit: store credit and partial reversals
Some payment systems also offer partial captures and partial reversals. A hotel pre-authorises £500 for a four-night stay, the guest leaves on day three with a £380 bill, and the front desk releases the unused £120 via a partial reversal. That is not the same as capturing the full £500 and refunding £120: the partial reversal costs you nothing; the refund route loses you the fee on the extra £120.
Who initiates a reversal
You initiate most reversals through your gateway, but they can also happen automatically. If you do not capture within the auth window, the scheme expires it for you. The timings matter: Online card authorisations are valid for 7 days on Visa and Mastercard. In person, Visa gives 5 days and Mastercard 2 days. Stripe lets you request an extended hold on eligible online card payments if you need longer. After the window, the auth lapses and the hold drops by itself. The reason you do not want to rely on that: the customer’s money sits ringfenced the whole time, with no notification that you have abandoned the transaction. Voiding it actively is the better customer experience, and it takes ten seconds in the dashboard.
The Differences That Matter for Merchants
Four things change depending on whether you reverse or refund: your cash flow, your settlement timing, what the fees cost you, and what your customer sees on their statement.
| Dimension | Reversal (void) | Refund |
|---|---|---|
| Cash flow impact | None. No money moved. | Real cash movement. Deducted from next payout batch. |
| Settlement timing | No settlement entry created. | Appears as a debit in your next payout from the acquirer. |
| Fee implications | Zero: no capture, no fee. | Processing fee from the original transaction is not returned. |
| Customer experience | Pending charge disappears once the bank releases the hold. | Refund credit appears 5–10 business days after issue. |
| Accounting entry | No entry needed: the original auth never settled. | Two entries: original sale debit and refund credit, plus fee loss. |
| Risk of chargeback | None: no settled transaction to dispute. | If refund is delayed, cardholder may raise a dispute before it arrives. |
When You Will Face Each One
Whether a reversal is even on the table depends on how your stack handles capture, and that varies sharply by business model.
Picture a Manchester florist whose customer rings to cancel a £65 bouquet the same afternoon they ordered it. The florist has a clean reversal window, provided the system separates authorisation from capture. Most entry-level card terminals do not. If the terminal captured at the point of sale, the only route left is a refund, and the 1.5% + 20p is already spent.
A SaaS operator running monthly subscriptions almost never uses reversals. Subscription charges are captured at the moment of billing, so by the time the customer asks for their money back the transaction has already settled. The question for you is not “void or refund”. It is “how fast do I refund before the customer raises a dispute.”
If you run e-commerce on an authorise-on-order, capture-on-despatch model, you have a real reversal window. A customer who cancels before the warehouse picks the order can be voided for zero fee. The Stripe API spells out the choice: PaymentIntent.cancel voids the auth, Refund.create refunds a captured payment. If your support team has been firing Refund.create for every cancellation regardless of capture status, you are leaving money on the table every week.
A restaurant running a tab-based pre-auth (say a £100 pre-auth on the card when the customer sits down, settled against a £74 final bill at the end of service) should be partial-capturing the £74 and letting the £26 go through a partial reversal. Capturing the full £100 and refunding £26 means you pay the fee twice over for no reason.
How Leading UK Acquirers Handle Each
The mechanics are consistent across Visa and Mastercard. What changes is how each gateway exposes the choice to you and how the fee gets treated.
Stripe
Stripe makes the refund/reversal split explicit in the API, and that is the main thing in its favour here. PaymentIntent.cancel voids an uncaptured authorisation at no cost. Refund.create issues a post-capture refund and Stripe keeps the 1.5% + 20p you paid on the original UK card transaction. The chargeback dispute fee is £20 per dispute received, and since 17 June 2025 Stripe charges a further £20 if you counter a dispute, which it returns if you win. On Stripe’s standard no-monthly-fee pricing, those two line items are your main per-event cost exposure. See our full Stripe review for rates and contract terms.
Square
Square charges 1.75% in person with no fixed component. You process refunds through the Square dashboard or the app, and Square’s pages do not say the original transaction fee comes back, so budget to lose it. The architecture is the issue: Square bundles authorisation and capture into a single contactless or chip transaction, which means a card-present sale almost never has a reversal window. Pre-auths are not the default: Square documents them as delayed capture through its Payments API, where an in-person authorisation lasts 36 hours unless you set a shorter window. If your business is mostly in-person, Square’s refund handling is fine for what it is, but the workflow does not make reversal-first thinking easy. Our Square review covers the rest.
Worldpay
Worldpay’s acquiring contracts vary sharply with business size, and Worldpay does not publish how a refund treats the fee on any of them. If you are on Worldpay’s published SME pricing (where the acquiring margin is blended into a single rate), assume you do not get the fee back on refunds. On a bespoke acquiring contract, the refund terms are whatever that contract says, so we make no assumption either way about the interchange part.
Adyen
Adyen’s interchange++ pricing is the most transparent on this point, because the interchange, the scheme fee and Adyen’s own fee each show as a separate line. Adyen’s pricing page does not say whether any of those lines come back on a refund, so we do not assume a refund on Adyen costs you less than one on Stripe. What the itemised statement does give you is an exact record of what each refund cost, which makes the case for reversal-first handling easy to measure on high volume.
GoCardless
GoCardless runs on Bacs Direct Debit rails, not card scheme rails, so the mechanics work differently. A GoCardless refund is you initiating a fresh outbound payment to the customer’s bank account. There is no “reverse the original debit” option in the card-scheme sense. GoCardless’s pricing page lists no separate refund fee, and it does not say the fee on the original collection comes back. Indemnity claims (where the customer disputes a Direct Debit charge directly with their bank) are GoCardless’s equivalent of chargebacks and we cover them in the Direct Debit section below. See our GoCardless review for the subscription billing context.
Direct Debit Reversals: The Bacs Indemnity Claim
If you collect payment by Direct Debit (subscription business, utility, membership organisation), the “reversal” mechanism on your rails looks nothing like a card scheme void.
Under Bacs rules, the Direct Debit payer can claim an indemnity from their bank for any collection they believe was taken in error. The bank refunds the payer on the spot and reclaims the funds from you through an indemnity claim. It is not the same as a card chargeback in legal terms, but the day-to-day experience is similar: the money disappears from your account, often with very little notice.
The Direct Debit Guarantee entitles the customer to a full and immediate refund from their bank if an error is made in the payment, and the guarantee itself sets no time limit on the claim. There is no void equivalent on Bacs. Once you have submitted a collection, your only choices are to cancel before the collection date (if you spot it in time) or refund after settlement.
If you are on GoCardless, the dashboard surfaces indemnity claims for you and handles the mechanics, but you stay liable for the amount claimed back.
Open Banking and Pay by Bank
Pay by Bank (open banking payments) is a newer UK payment method that bypasses the card scheme rails altogether. The customer authenticates in their banking app and pushes a transfer directly from their account to yours over Faster Payments.
There is no authorisation in the card-scheme sense, so there is no reversal window. If a Pay by Bank transaction has to be cancelled or corrected, your only route is a refund: a fresh outbound payment from your account back to the customer’s. Faster Payments will settle that in seconds, which beats a card refund on speed, but you still pay whatever processing fee the open banking provider charges.
Providers offering Pay by Bank in the UK include GoCardless Instant Bank Pay, Stripe’s bank debit integrations, and dedicated open banking platforms. Refund mechanics and fee treatment vary by provider.
Accounting and Consumer Rights Act 2015 Implications
The Consumer Rights Act 2015 entitles your customer to a full refund for goods that are faulty, not as described, or services that have not been provided. You cannot deduct your payment processing costs from the refund amount: the full purchase price has to be returned. The processing fee is your cost to absorb, not a line item to subtract from what the customer is owed.
That has accounting consequences. A £100 refund on Stripe leaves you £1.70 out of pocket: the £100 goes back to the customer, but the £1.70 processing fee you paid on the sale does not come back. The refund and the lost fee are separate entries in your books. If you are reconciling in Xero or QuickBooks, you need to log the full refund as a revenue reversal and the retained fee as a distinct cost line. Lumping them together understates what your returns are actually costing you.
If your sales are VAT-registered, a refund also triggers an adjustment to the VAT you have already reported. HMRC guidance is that the VAT element of any refund is adjusted in the VAT return for the period in which the refund is issued.
A reversal creates no accounting entry at all. No settlement happened, so no revenue was recognised and no VAT was reported. There is nothing to undo.
Frequently Asked Questions
What is the difference between a refund and a reversal?
A reversal (also called a void) cancels an authorisation before the payment has been captured and settled. No money moves, and you are charged no processing fee. A refund corrects a payment that has already been captured: money flows back to the cardholder, and the processing fee you paid on the original transaction stays with the acquirer. Which one applies comes down to the timing of the cancellation relative to settlement.
Does Stripe charge a fee when you issue a refund?
Stripe does not charge you an extra fee when you issue a refund, but it does not give back the original processing fee either. On a standard UK card transaction at 1.5% + 20p, a £100 refund means you have paid £1.70 in fees and you get nothing back. That covers both the percentage and the 20p fixed component. A reversal (a void via PaymentIntent.cancel on an uncaptured authorisation) costs nothing, because no capture fee was ever charged in the first place.
How long does a reversal take to show on the customer’s account?
The pending charge clears when the issuing bank releases the hold, and the timing is the bank’s. A reversal needs no refund credit to travel back, so it is the faster route for the customer. A refund credit takes approximately 5 to 10 business days to arrive, according to Stripe. If a customer rings to ask whether the pending charge has gone, tell them the hold is released on your side and the display is up to their bank.
What happens if I do not capture an authorisation? Does it just expire?
Yes, but waiting for the auth to expire is worse practice than voiding it actively. Online card authorisations are valid for 7 days on Visa and Mastercard. In person, Visa gives 5 days and Mastercard 2 days. Stripe lets you request an extended hold on eligible online card payments if you need longer. If you do not capture within the window, the auth lapses and the cardholder is never charged. The problem with relying on that: the customer’s funds stay ringfenced the whole time and they get no notification, so they have no way to know the charge will eventually drop. An active reversal releases the hold immediately and saves you the support ticket.
Should I issue a refund or let the customer raise a chargeback?
Refund. Always. A chargeback raised by the cardholder after a settled transaction carries a £20 dispute fee on Stripe whether you win the case or not, plus a further £20 if you counter it and lose. The cleaner play is to refund within 24 hours of the cancellation request so the chargeback never gets raised in the first place. Your fee loss on the refund is certain and calculable; the chargeback fee is £20 piled on top of that, plus your team’s time.
Do refunds and reversals work the same way for Direct Debit?
No. Direct Debit payments travel over the Bacs network rather than card scheme rails, and the mechanics are different. There is no card-style reversal window: once a collection has been submitted to Bacs, your options are cancelling before the collection date or refunding after settlement. The Direct Debit Guarantee gives your customer the right to a full and immediate refund from their bank if an error is made in the payment, and it sets no time limit on the claim. If you collect by Direct Debit via GoCardless or a similar provider, indemnity claims function like chargebacks: the funds come back out of your account. GoCardless says it adds no extra fee for an indemnity claim.
Methodology and Disclosure
This page was researched and written by Mike Smith, edited by Antony Smith, in May 2026. Factual claims about Stripe’s processing fee (1.5% + 20p for UK cards), refund fee policy (processing fee not returned), and chargeback dispute fees (£20 per dispute received, plus £20 per dispute countered since 17 June 2025) are sourced from stripe.com/gb/pricing, docs.stripe.com/refunds and docs.stripe.com/disputes. Visa and Mastercard authorisation expiry windows are sourced from Stripe’s documentation of the card network rules at docs.stripe.com. Consumer Rights Act 2015 guidance is sourced from gov.uk. Square’s fee figure is sourced from its UK pricing page. Rates and contract terms move, so the figures above were read from the sources named in this note in October 2026.
This guide includes affiliate links to Square and GoCardless. Affiliate placement does not affect editorial verdicts.
Affiliate disclosure: BusinessExpert may receive a commission if you sign up for a payment processing service through a link on this page. This does not affect our editorial recommendations. Where affiliate relationships exist, they are declared. Our editorial team maintains independence from commercial relationships. Recommendations are based on fee structures, product capabilities, and fit for UK SMEs, not on commission rates.
Related pages: Payment Processing: How It Works for UK Merchants | Stripe Review (2026): Rates, Features and Verdict | Square Review (2026) | GoCardless Review (2026)
Last reviewed October 2026.