Processing credit card payments should be a routine aspect of every business. A business owner should understand the different types of credit card processing to make the best decisions for their company.
What is Credit Card Processing?
Credit card processing is the series of operations necessary for completing payments with the help of a credit card – online, by email, in person, or over the phone.
Credit card processing can include different transactions outside the domains of a standard purchase. Here, the consumer will use the respective card to pay for some purchases right away. At the same time, business owners will receive funds from the transaction.
A consumer can make use of the credit card for several activities – right from checking in to a hotel room to returning some item to the retailer, filling up their vehicle’s tank, and so on. Every transaction will require a merchant to execute a separate credit card transaction.
Types of Credit Card Processing Transactions
Here is an insight into the different types of processes or transactions associated with credit card processing for any business:
An authorization or pre-authorization credit card transaction is quite similar to the purchase process. However, pre-authorization does not complete the sale. Funds are also not yet captured but may be placed on hold by the issuing bank. Just like some purchases, the transaction gets processed in real-time. An approval code is offered to the merchants for the particular amount. However, the funds do not get debited from the cardholder. Instead, they are reserved or frozen between 7 to 10 days.
As the merchant becomes ready to ensure ‘capturing’ of the pre-approved funds, the merchant is expected to submit the ‘capture request’ for completing the sale.
Pre-authorization credit card transaction is mainly implemented at gas stations, hotels, and car rentals. Here, the merchant is expected to make sure that a specific amount of available on the credit card. When pre-authorization is not captured within seven days, the funds get unfrozen and ultimately released to the original cardholder.
For example, a gas station may pre-authorize a card for $100 to cover the maximum amount of the transaction but might only capture and settle a transaction for $50 based on the actual amount of gas purchased. Some business types allow the captured amount to be a certain percentage higher than the authorization amount to allow for tipping. A restaurant might authorize $100 for a meal check and then capture and settle $118 based on the amount of the tip left by the customer. This amount can potentially exceed 20%, but if the amount greatly exceeds the pre-authorized amount, then the transaction might be more susceptible to a chargeback or dispute.
After the process of credit card pre-authorization, capture takes place. A successful capture should feature the original code generated out of pre-authorization. Captures can take around 30 days to complete after the original credit card pre-authorization process. However, the funds remain frozen only for the first seven days. This implies that while ensuring a capture transaction on the 20th day, there is still no assurance that the merchant will have access to funds on the credit card.
Captures can be made to the full or lesser amount of pre-authorization. However, in most cases it cannot be made more than the amount of pre-authorization. For instance, most pumps at gas stations ensure the pre-authorization for $100. However, the final capture is usually made for a lesser amount. The amount that is uncaptured is returned to the credit card. Some business types like restaurants and salons can capture 20-30% more than the authorized amount to allow for tipping.
A refund transaction is performed after a specific batch gets settled. A refund can be regarded as a type of ‘negative purchase.’ It is similar to the stand-alone purchase transaction but depicts a negative amount rather than a positive amount. Therefore, it is always recommended to void the transaction rather than perform a refund if possible.
The customer will see both the refunded amount and the original amount when a refund gets processed. The refund amount gets debited from the merchant and sent back to the consumers. Although refunds get processed in real-time, the issuing bank of the customers can take around 7-10 business days to display the same on the bank statement.
This transaction is used for canceling a transaction that has been previously authorized. For instance, if some incorrect amount has been entered for ensuring a credit card purchase, the transaction can be made void. Then, the transaction can be processed again with the help of the right amount. A void transaction is executed in real-time to the respective card network. It, therefore, tells the issuing bank of the customers to cancel the approval code and the transaction.
The customer is not charged anything for the original transaction if void. Therefore, when a transaction is made void, it helps prevent the charging of interchange fees. However, if transaction processing occurs in a refund, one will not receive the interchange fees for the specific transaction.
A void is performed only if the particular batch has not been settled. If a batch has been settled already, performing a void is impossible. Instead, a refund is executed.
Verification is also sometimes referred to as a $0 transaction or $0 authorization. A verification transaction takes place in a card-not-present situation. In this scenario, the merchant wishes to verify the credit card. However, they cannot process a particular amount then. In most cases, the transaction is used to ‘tokenize’ the credit card to be used later. When verification is performed, one should check the validity of the credit card number along with card security and expiration date. The cardholder’s account balance is not verified as no amount is transferred.
When a business understands the different types of credit card processing transactions, it can easily select the correct type of transaction under different scenarios for the business. Therefore, one should search for a reliable credit card processor to help the business and its customers for maximum results. The best credit card processor for small-sized business owners should be capable of providing secure, reliable, and cost-effective services that bring ultimate convenience.