Eli5: Why do refunds take so long?


How long does it take for a merchant (like walmart) to take your money? Seconds.
How long does it take for a merchant to give your money back? Days, maybe even a week.

I kinda wanna know why ACH is a difference too, but really just want my refund back and where it is 😂

In: 0

Card transactions aren’t instant in either direction. The recipient of a transaction isn’t granted funds until the transaction settles.

ACH isn’t guaranteed money.

Think of it a bit like a check. If I gave you a check for 100 dollars, you wouldn’t give me 100 in cash, the same day. Because if the check isn’t valid, you are out 100 bucks.

ACH is the same way. I can pull 100 bucks from your account via ACH, but I don’t know that its valid for a few days. So if you request a refund, I’m not going to issue a refund to you until the original ACH has cleared. And ACH transactions are also just slow. Paying an ACH same day is possible, but its often more expensive, and more difficult, so it’s just not done when not 100% necessary.

And even if we are talking about something like a credit card. You see it pulled from your account immediately, but it might take a day or two for the merchant to see the funds. If he issues a refund immediately, it will take you a few days to see the refund. They system is just slow.

Merchants take your money and keep in an account that earns interest for them — the longer they keep it, the more money they earn — there’s simply no monetary reason for them to make the refund quicker.

The long story short is because money takes a while to move.

When you run your card at a merchant it doesn’t actually get the money that instant. Essentially their computer calls your banks computer and says “Hey, PumpernickleCrouton is trying to charge $100, is that cool?” Your bank says “Yeah, that’s cool” and puts an Authorization on your account which temporarily deducts $100 from your available balance. At this point no money has actually changed hands.

Over the next few days, usually 1-4 business days, the merchants bank will reach out to your bank and say “Here’s that Authorization you gave me, can I have the money?” and your bank sends them the money and removes the authorization from your account. The net result from your perspective is nothing happened. Your available balance hasn’t actually changed because instead of a ghost $100 being on hold reducing your balance an actual $100 has been deducted. But from the merchant’s bank’s perspective everything has happened, because they’re now $100 up.

But say you want a refund. The merchant can’t exactly return the money if they haven’t gotten it yet, plus it still takes time for the money to actually get transferred from their bank to yours. So after the 1-4 business days when they actually have the money they can send it back, which also takes 1-4 business days.

So while the purchase seems instant, it’s all smoke and mirrors. The refund isn’t instant because you have to wait for the actual transfer of funds.

Because they can.

And the longer they hold on to money for, the more interest they accrue on it so it’s in their interests to bring money in as fast as possible and release it as late as they possibly can.