Why does it take 5 seconds for credit card companies to take money out of my account but 5 days to refund it?

One of our readers asked us this question.

Why does it take 5 seconds for credit card/debit card companies to take money out of my account but 5 days for them to refund it?

Short Answer:  Different systems.

Long Answer:  First you have to realize there is a difference between authorizations and postings.

A charge is only “real” against your account when it’s posted. It’s posted when the merchant does their batch close (typically) except for debit. When you do a credit transaction there is an authorization against your account but you don’t “owe” the money until it posts.

Refunds to debit if done at a POS terminal should be automatic (just like charges).

Refunds to credit take time because they go through the same path as charges. If it took 3 days for your charge to post you can be assured it will take 3 days for the refund to post.

Now why don’t they just authorize refunds? I suspect because when you auth a charge no money has changed hands yet. The bank [or credit company] still has the money they were lending you. It only goes to the merchant when they do a batch close and post the transaction. So if they did an auth refund there would be two copies of the same money. You’d have your refund and the merchant wouldn’t have had to cough up the money yet.

Now why do they take so long to do batch closes? Probably because each close costs money (+ transaction fees and percentages). So they do them every few days to save money.

In simple terms,

5 seconds after you complete your transaction: the money leaves your account.

5 seconds to 2 days after: The bank/credit card company is holding onto the money while they check all the info, make sure its all legit, go through federally mandated safety measures, etc.

2 to 3 days after: The merchant actually receives the money.

Now, just apply that in reverse for refunds. 5 seconds after the transaction, the money has left the merchant’s account, then the bank does a day or two of processing, and then, 3 days later, you finally get the money.