Navigating MSP Client Payment Refunds: A Step-by-Step Guide for Efficient Processing

Fraudulent refunds and returns cost US merchants $101 billion in 2023. Mitigating the financial damages from refunds can be particularly challenging for MSPs. 

Operating under complex service level agreements (SLAs), interpreting and enforcing the conditions under which refunds could be issued is challenging. 

Unlike requesting a refund for a physical product, MSPs provide highly customized services tailored to each client's needs. As such, refunding clients for intangible services poses a major challenge. 

For example, consider a client who purchases a comprehensive IT support package.  This package includes network monitoring, cybersecurity, data backup, and technical support. 

The client is dissatisfied with the network monitoring portion of the service but not the other areas and requests a refund. 

Because the client is unsatisfied with just one portion of the service they paid for, it is difficult to quantify the value of that one service provided and the appropriate amount to refund. 

You must decide if the client is eligible for a refund, if it’s worth disputing their request, how much of a refund to provide, and the costs of implementing these systems for which you might not be recouped. 

Fortunately, a much more efficient refund process, a detailed understanding of crucial steps for efficient refund processing, and a strategic approach make a profound difference. This article will provide you with all of that knowledge.

⁤This is your comprehensive guide to navigating MSP client payment refunds. We aim to equip you with the tools and strategies to manage refunds effectively.

⁤By the end of this blog post, you will understand how to properly handle MSP client payment refunds to benefit your operational efficiency and client relationships.

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9 Challenges in Managing MSP Client Payment Refunds

Processing client payment refunds in the MSP industry has its challenges. Proactively managing these issues maintains operational efficiency and client trust.

Many factors and challenges at play complicate the MSP client refund process. 

Below, we discuss nine of the most pressing.

1. Complex Refund Processes

Issuing a refund involves following several steps.

Each one requires you to review the case in detail to avoid the risk of errors.

A lengthy refund process is a pain point for clients, especially if communication isn’t consistent during the waiting period. For the MSP, these slow procedures lead to lost administrative time your staff could spend on more critical tasks.

An Example Process of Issuing MSP Client Payment Refunds

To illustrate the steps involved in issuing MSP client payment refunds, consider an MSP that receives a refund request from a client. This client claims they were overcharged for a service.

Here is how an MSP might handle this request:

• The MSP must first confirm that the client paid that specific amount and whether the service was delivered. This step gets complicated in both respects: transactions must often be checked across several departments and compared to service records.
  Depending on the nature of the refund request, this could involve customer service, your finance team, and field service delivery. Each department might have its own systems and processes. When you need to collect information from numerous departments, this slows down the refund process.

• Next, the MSP must check its refund policy to determine whether the request falls within the acceptable time frame and terms. If the policy states that you only provide refunds within 30 days of payment, and this request is at 45 days, the MSP must decide whether to make an exception or deny the refund.

• Considering any partial service use, the correct amount must be calculated if approved.

• Once all these steps are complete, the MSP must initiate the refund through its payment processor and update its records accordingly. Then, it can inform the client that it has issued the refund and when to expect to see it back on their account.

As you can see, this process is time-consuming, requires multiple checks and balances, and quickly leads to errors if not managed efficiently.

2. Compliance Issues

Along with the complexity of the refund process itself, managing refunds in compliance with industry standards and regulations adds another layer of difficulty.

Many businesses must comply with various financial regulations when processing refunds and payments.

For example, Compliance 101 explains that if a merchant in the US, Canada, or Latin America does not first attempt to return a payment to the original card with approval, the merchant is liable to the issuer disputing the transaction and to potential fraud charges.

3. Costs of Non-Compliance for Payments and Refunds

MSPs must comply with applicable financial regulations, consumer protection laws, and security standards, including PCI DSS and SAQ-A compliance.

Without the proper authorization for return transactions, you risk being responsible for the subsequent costs of fraud (which aren't just financial).

In a 2022 study, 41% of MSPs reported being affected by PCI DSS compliance requirements. 

Depending on the type of non-compliance, these effects can include:

• Financial losses due to chargebacks
• Non-compliance fines
• Damage to the company's reputation
• Higher processing fees
• Damaging customer trust and loyalty
• Closer scrutiny from financial institutions
• Administrative costs of handling fraudulent transactions
• Legal consequences and liability

4. Customer Trust and Satisfaction

How you handle MSP client refunds can build or break relationships.

Client trust and satisfaction help you retain your clients in the long run. However, if clients feel you didn't handle their refund requests properly, they could take their business elsewhere, leave negative reviews, and damage your reputation. 

Conversely, refunding a client is a chance to go the extra mile for customer service when done well. 

A study by Microsoft Dynamics 365 quantified the importance of offering excellent customer service: 90% of respondents indicated that customer service is paramount to their choice of and loyalty to a business.

A swift refund process demonstrates how much you value your clients' satisfaction and are willing to make things right.

5. Transaction Errors

Refunds can be complex enough on their own. The MSP client refund process is even more complicated when you add transaction errors.

Errors occur for many reasons. 

For your MSP, these are often due to human error, glitches, outdated software, or issues with payment processors. Identifying and resolving these errors promptly is critical to maintaining customer satisfaction and compliance with regulations.

An MSP may issue a refund of $500 instead of $50 due to a data entry error. 

This mistake results from a human error in manual refund processing. It results in financial losses and complicates the accounting records. Then, additional time and effort are necessary to set things straight.

These mistakes delay the refund process and undermine client trust. If a payment is mistakenly returned to the wrong account or in the wrong amount, clients are likely to be dissatisfied and lose confidence in the MSP's credibility.

5. Fraud 

Fraudulent returns are an increasing concern for businesses worldwide — a 2021 report from Juniper Research predicts the global cost of online payment fraud will reach US $206 billion by 2025.

Another report from 2022 predicts businesses could lose over US $343 billion due to online payment fraud globally between 2023 and 2027. 

Businesses selling physical products may find distinguishing between legitimate and fraudulent returns easier. Physical products or hardware defects are more straightforward to verify. 

However, this is more challenging for MSPs that offer services rather than physical products.

For example, if a client asks for a refund for a service they say you did not provide, you can refer to service logs on your PSA, payment records, and client communications to confirm.

6. Impact on Cash Flow

Whenever your business issues refunds, it opens you up to cash flow problems. 

Consider the impact a $5,000 refund could have. If you set a business budget with that $5,000 monthly profit in mind, you are left recalibrating your budget and potentially facing a cash flow shortage.

In this case, that means you have $5,000 less for payroll, covering emergencies, paying for operational expenses, or any other costs. 

7. Technological Limitations

Inadequate software disrupts efficient refund processing. 

MSPs that rely on outdated or insufficient payment processing systems that lack the necessary features to handle refunds efficiently deal with issues such as:

• Slower processing times
• More manual errors
• Greater administrative burden
• Security vulnerabilities
• Downtime costs

Consequently, your clients are more likely to be frustrated with the refund process, which could lead to a potential loss of trust in your business and the loss of their business altogether.

Outdated systems might not support newer payment methods either. This includes mobile wallets or cryptocurrencies. As these forms of payment become more prevalent, an MSP without the ability to process them will fall behind its competitors.

‍8. The Cost of Slow Refunds

Processing payments manually takes longer, costs more, and results in more mistakes than automatic processes.

Manually processing refunds requires significant administrative effort. Verifying, calculating, and issuing refunds can be slow, labor-intensive, and prone to errors.

It includes cross-checking multiple records, calculating refund amounts, and entering data into payment systems.

According to some estimates, the time it takes to process payments can be cut by 70-80% when businesses switch from manual to automated processes.

A study from the Institute of Finance and Management also found that for businesses that rely on manual payment processing, it takes $8.78 to process one invoice. If that business uses advanced payment processing automation, it costs $1.77

This is a nearly 80% decrease in processing costs. It is also a significantly shorter process with automation versus manual refund processing. 

Take an MSP that spends $4,000 monthly on manual payment processing (including refunds). If the MSP switches to fully automated payment processing and cuts its costs by 80% (using ACH instead of credit card payments), it would reduce its monthly invoice processing costs to $806.40.

With monthly savings of $3,193.60, automating payment processes saves this MSP $38,323.20 each year.

Beyond the cost savings, they also save significant labor that can be better spent on other tasks. 

9. Ambiguous Refund Policies

Any ambiguity in your refund policies or insufficient communication about refund policies frustrates clients. Clients need regular updates on the status of their refund requests, but you must also inform them about your return policy from the get-go.

Vague return policies contribute to client disputes that cost you time and money. Unclear refund policies lead to unrealistic expectations or misunderstanding of the terms under which refunds are issued. 

For example, your refund policies must clearly outline when they are eligible for a refund, when refunds are not applicable, how long they can expect the refund process to take, and when they will see their funds in their account.

Refunds vs. Chargebacks

If you deny a client's refund request, they might file a chargeback instead, which will cost you even more money.

A refund comes from the merchant, while a bank initiates a chargeback. 

Because the bank is refunding the cardholder, banks charge merchants to compensate for the time and money spent doing so. 

Chargeback Fees

Most acquiring banks charge MSPs between $20 and $100 per chargeback. This fee incentivizes MSPs to avoid chargebacks as much as possible.

With chargebacks, you might have to pay interchange and chargeback fees. Major payment networks, including Visa, Mastercard, American Express, and Discover, charge between 1.0% and 4% in credit card processing fees.

If you issue a refund promptly, it can discourage your clients from filing chargebacks and, in turn, prevent you from paying additional fees.

Refund Fees

Chargebacks have more fees and consequences than refunds. However, there are still costs associated with issuing refunds. The amount you’ll pay and whether or not you will be reimbursed varies by credit card company and pricing structure. 

Many of these costs are not charged due to a refund; rather, the credit card company simply does not reimburse the merchant for them after the refund has been issued. 

For example, you might pay a 3% transaction fee to process a $1,500 payment. Even if you refund the full transaction amount to the client, this $45 is not refunded to you. 

Refunds are an inevitable part of business for any organization accepting payments. While they can be a nuisance, there are ways to improve the process.

Step-by-Step Guide for Processing MSP Client Payment Refunds

This step-by-step guide will teach you specific steps to improve your process for issuing MSP client payment refunds.

Handling client payment refunds efficiently and overcoming the above mentioned challenges requires a clear, actionable plan. 

Follow these steps when you process MSP client refunds to create a smoother, less error-prone process.

1. Review Policies

Establishing clear refund policies is one of the best ways to set yourself up for success.

With clearly outlined and easily accessible refund policies, your clients will know what to expect when requesting a refund or if they have a legitimate reason for one.

These are some of the conditions to include in your refund policy:

• The time period for refund requests
• Cancellation and termination policies
• Refund eligibility
• Non-refundable services
• Refund processing times
• Penalties and any special agreements made with the client

Detailing the reasons for the decision and communicating them to the client helps prevent misunderstandings and disputes.

2. Verify the Refund Request

The next important step is confirming the validity of the refund request. Scrutinize your refund requests for completeness, accuracy, and legitimacy.

To do so, you may need to call on various teams, such as customer service and accounting, to provide client communications and accounting records to confirm payment details. 

A standardized checklist ensures you do not overlook any steps during this verification process.

For instance, if a client requests a refund for a service they claim was not provided, you must verify the transaction by reviewing service logs on the PSA, payment records including past invoices), and client communications (such as an email trail).

This thorough verification ensures the refund request is legitimate and that the MSP is not issuing refunds for services that were, in fact, rendered.

3. Calculate the Refund Amount

Once you verify the refund request, determine the refund amount to issue. Include service usage fees, penalties, and any other adjustments.

Precise calculation eliminates over- or under-refunding and resulting disputes.

Rely on your MSP payment software to automate your payment processes, reduce the risk of errors, and process refunds quickly and accurately.

4. Process the Refund

The next step is initiating the refund through your payment gateway or financial software.

Depending on the client's original payment method, you could issue refunds through credit card processors, bank transfers, or other financial systems.

If the payment you intend to refund was made via credit card, the first attempt must be made using the same credit card. Follow the protocols set by these systems carefully to ensure the refund is processed correctly; otherwise, you risk PCI non-compliance. 

5. Communicate the Refund Decision

Client communication is important even after you complete the refund. Update clients promptly on refund decisions. This lets you iterate and reinforce refund policies that a client might have overlooked.

Include a breakdown of the refund calculation and adjustments that were applied.

6. Inform the Client

Proper refund handling is vital for client satisfaction. If your clients are well-informed throughout the refund process, they are less likely to seek answers from your customer support team or their bank about the purchase.

If they do contact their bank, you could face a double refund chargeback. 

This means you issue a refund, and the bank also issues a chargeback. Then, you're responsible for double the initial purchase costs plus chargeback fees.

7. Document Everything

Create a paper trail and record every email or phone call you make with a client. Also, keep records of all other steps and any other details.

Proper documentation helps protect your MSP from any future chargebacks or disputes.

8. Analyze Refund Trends

If you notice more refund requests from the same client or for the same service, there may be underlying issues you want to investigate.

For example, if one of your services has a higher rate of returns, it could signal that you need to change it or market it differently to set clearer expectations.

Tracking refunds offers insights into potential fraud or policy areas you must adjust.

Use this data to be proactive with your MSP client payment refunds instead of reacting to individual claims.

9. Proactive Client Education

Educating your clients about the refund process and policies during onboarding and at the point of sale sets expectations from the outset.

A detailed FAQ section on the website and a discussion of refund policies during initial consultations help inform clients and reduce disputes.

Some of the questions to answer regarding your refund process include:

• What is your refund policy?
• How long does it take to process a refund request?
• What information is required to process a refund?
• Are there any fees associated with refunds?
• What is the time frame for receiving a refund?
• What happens if there is a dispute over a refund?

Best Practices for MSP Client Payment Refunds

Along with the step-by-step directions for handling MSP client payment refunds, there are also general best practices to follow. 

These guidelines can not only make the refund process smoother but, in some cases, help you avoid refund requests in the first place.

1. Utilize MSP-Specific Payment Processing Software

Handling payment processes independently with only traditional payment processing systems is not the most efficient option for MSP payments.

Instead, entrust MSP-specific payment software to provide the necessary functionality, automation, and efficiency.

With FlexPoint as your MSP payment software of choice, you benefit from:

• MSP payment automation with AutoPay 
• Setting custom rules for all clients or specific rules for certain clients with AutoPay
• Same-day payment processing approval
• Real-time payment tracking
• Offering your clients a frictionless way to pay
• Streamlined invoice communications in branded payment portals
• Customizable reporting with knowledge and insights to quickly identify payment issues
• Eliminating or reducing the burden of PCI compliance with security regulations

2. Ensure Swift Refund Processing Timelines

As FasterCapital explains, “Monitoring the speed and efficiency of the refund process is an indirect but valuable measure of customer satisfaction.”

Refund metrics, including the average time it takes to process them, demonstrate how well you meet client expectations.

The data you collect can inform your decision- and policy-making moving forward. Based on this data and your MSP’s capabilities and resources, set a reasonable timeline for refund processing.

3. Ask Your Client if They've Brought Up the Issue with Their Bank

Ask clients not to contact their bank about reversing the charge (if they have yet to) and wait for the refund to be processed. 

This proactive approach demonstrates your willingness to help the client and get to the bottom of the issue.

It is essential for you to know if your client has already asked the issuing bank to reverse the charge.

If the bank has already reversed the charge and you refund the payment, this is a case of a double refund chargeback, as described above.

4. Train Staff to Issue MSP Client Refunds

Comprehensive training to teach your staff how to process refunds or manage refund denials will improve your team’s ability to handle these issues efficiently. 

Topics to cover include:

• Why they must follow company refund policies
• Your refund verification and approval procedures
• Communicating with clients about refund decisions and policies
• Best practices for record-keeping

5. Prioritize Personalized Client Service

Treat each refund case individually, balancing out standard procedures with some flexibility to fit an individual client’s needs. 

Imagine a long-term client who requests a refund outside the expected timeframe. In this case, you might offer a customized solution, such as a partial refund and additional support services.

This extra step shows the client you are committed to a satisfactory outcome for them and reinforces a good relationship with the client.

6. Collect Client Feedback

Collect client feedback after processing refunds to learn from each case and improve service based on what you find out.

Implementing a structured feedback mechanism helps MSPs understand client experiences and make necessary adjustments to refund processes. Electronic surveys or follow-up calls are two ways to collect this feedback.

Conclusion: Enhancing Client Trust Through Efficient Refund Processes

Managing refunds for MSPs can be complicated, challenging, and time-consuming, but it doesn’t have to be.

An effective refund process requires:

• Clear refund policies and procedures
• Training your staff to handle refund requests
• Optimizing the payment process with MSP-specific payment processing software

An efficient refund process, like the one described in this blog, will retain more clients, minimize disputes, and even enhance your cash flow.

At FlexPoint, we recognize managed service providers’ pain points regarding payment processing and offer a single solution that addresses all of these concerns.

Hundreds of MSPs use FlexPoint to automate payments — and refunds — on our PCI-compliant, secure payments automation platform.

When WJP Technology Consultants, a trusted cybersecurity and IT services firm, enlisted FlexPoint to simplify its day-to-day accounting process, they experienced three key results:

• A 30% increase in clients using AutoPay
• Three-times faster payment processing
• 15% cost savings

FlexPoint also consolidated SkyCamp Technologies' payment processing to a single platform, improving the Ohio-based MSP's cash flow with automated and on-time payments.

As a result, SkyCamp the following results:

• Saved eight hours per month 
• Saw a 20% increase in AutoPay use 
• Late clients paid 30% faster

If you are eager to get similar results for your MSP, contact FlexPoint today.

Enhance your MSP's refund management practices with FlexPoint's advanced payment solutions.

Schedule a demo to learn how our tools streamline your refund processes and improve compliance and client satisfaction.

Additional FAQs: Managing MSP Client Payment Refunds

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