An In-Depth Look at Credit Card Processing Methods

An In-Depth Look at Credit Card Processing Methods

An authorization hold—also know as a card authorization, pre-authorization, or pre-auth—is when a customer’s issuing bank authorizes a debit or credit card transaction and holding the balance as being unavailable. The transaction remains in this state until the merchant clears the transaction. This is also known as capturing or settling the transaction. With debit card transactions, the authorization hold can fall off the account one to five days after the transaction date, which means the balance is available again. With credit cards, authorization holds may last as long as 30 days.

Signature-Based Transactions

A signature-based (as opposed to PIN-based) debit or credit card transaction is a two-step process that consists of authorizing and capturing/settling the transaction.
When a merchant swipes a customer’s card, the POS terminal connects to the credit card processor, which then connects to the credit card issuing bank to authorize or decline the transaction. If the issuing bank authorizes the transaction, then it transfers the approved funds to the business owner’s retail merchant account for holding.

At the end of the day, the merchant submits all of his daily debit and credit card transactions to his acquiring bank in one batch, which initiates the settlement process. What many merchants may not realize is that the settlement process does not happen right away. The transaction may not appear on the customer’s credit or debit card statement for one to two days, and can even take up to three days for the merchant to receive all of the approved funds.

Authorization Holds Used to Reduce Online Risk

Online merchants often use authorization holds as a way to reduce the risks involved with credit card processing. When processing a pre-authorization transaction, the merchant can validate the customer’s card by reviewing the billing and shipping information. If the merchant suspects the transaction as fraudulent, he can cancel the order. Merchants have up to two weeks to capture or cancel a transaction before the bank automatically cancels the transaction by default. However, a merchant will not receive any funds until he captures the transaction and the settlement process begins.

Additional Online Credit Card Processing Methods

Another common method of online credit card processing is the authorization and capture method. For this type of transaction, the merchant sends the purchase amount to the customer’s issuing bank for authorization. If approved, the bank automatically submits the funds for settlement.

Authorization only method is exactly as it sounds—sent to the credit card issuing bank for authorization only. The approved funds will not begin the settlement process until the merchant submits a prior authorization and capture or manually captures the transaction in the payment gateway. Merchants have 30 days to capture an authorization only transaction in the payment gateway. After this time, the authorization expires and the transaction is unavailable for capture. If the authorization expires, the merchant will have to submit a new authorization only transaction and obtain a new authorization code.

Merchants can submit an authorization only transaction to verify if the funds are available before capturing and finalizing the transaction. This transaction method is also preferable if the merchant is currently out of stock for the purchased item or if the merchant wants to review an order before shipping the goods.

A merchant will use the prior authorization and capture method to complete a successful authorization only transaction. An authorization only and prior authorization and capture transactions considered one complete transaction. Once the merchant completes the prior authorization and capture part of the transaction, the bank will send the approved funds for settlement.

If a merchant receives authorization on a transaction not submitted through the payment gateway, he must then complete the transaction through the capture only method. The payment gateway accepts capture only transactions if the merchant submits the transaction with a valid authorization code or if submitted with the customer’s full credit card number and expiration date.

Instabill Payment Gateway and Merchant Accounts

For more information on how the Instabill payment gateway can help you prevent fraudulent transactions, visit us online and check out the Transaction Page and Fraud Prevention sections of our site. To apply for an Instabill merchant account, contact us online or call us toll-free at 1-800-318-2713.

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