As an online merchant, fully understanding the steps and stages involved in a transaction is important. Knowing these steps and the actions available to you as a merchant can help save on additional fees and rates that need apply when processing a transaction or refunding it. Needless to say the ability to use them will at the end of day increase your overall customer satisfaction. Here we will be breaking down the different types of transaction, from failing to authorize the transaction, to voiding the transaction. The terminology and even the availability of some of these transactions may vary from a processor to another and obviously from direct merchant accounts to third party accounts.
Authorization: Authorization, also referred to as Pre-authorization hold, Card authorization, Authorization Hold Auth, or Preauth, is the request to hold funds before the transaction is settled. When authorization is approved by the card issuing bank (the issuer), permission to place a hold on the requested funds is allowed. The funds are put aside, and can be held for an amount of time ranging usually from 1-9 days, and can be allowed to be held up to 30 days if not settled immediately. The main reason for an Authorization hold is to ensure that there are sufficient funds available to complete the transaction, that all information provided is correct, and that eventually, the issuer agrees to the charge. If nothing arises during this stage, the funds are held for the merchant, and these funds will be transferred to the Merchant Account (See: Settle transaction) unless instructed otherwise. Reasons for not receiving an approval from an acquiring bank can differ, from incorrect details and card information to security and card limitations instilled by the issuer bank, and will result in a failed authorization (decline).
Settle: A Settle transaction also known as a Capture is the finalization of the authorization process where the funds are settled. Dependent on processors and acquiring banks, settlement of the transactions can either happen immediately or may be processed by batch once a day. Apart from these infrastructural matters, deciding whether or not you should have your settlements processed immediately or by batch relies on the nature of your product/service and the quality of your customer base. The option to have all daily charges processed in bulk by batch does give the merchant the opportunity to void or cancel any recent transactions (See: Void transaction). However, if settled immediately, the settlement cycle is shortened but the transaction cannot be voided, and any completed transaction will have to be refunded if needed.
Sale: A sales transaction basically consists of the 2 transactions mentioned above sent at once (and charged only once). This type of transaction both authorizes the transaction and settles it.
As explained, deciding between the two modi operandi (auth/settle or sale) mainly depends on the nature of your business. If you are a Forex broker, handling large deposit amounts, switching from a sale processing to auth/settle will increase the processing cost by added 1 transaction fee (you should anyway discuss this with your processor), but it will give your Risk team and your processor’s an extra time to review the legitimacy of the transactions, consult one another and avoid handling refunds in a rush afterward (and potential chargebacks), when the transaction could have been discarded in the first place.
Void: A Void transaction informs the processor’s gateway that you do not wish to move on and settle the funds. Normally, the processor should then inform the acquiring bank that they should release the funds held during the authorization, but some Acquiring banks do not offer the processors with this option so in this case, the settle will not be sent, and funds will be released only after the hold expires.
It is important to note that if you work with “sale method”, you may still have the ability to successfully void the transaction, and this depends on the way your processor and the acquiring bank are interfaced. If they are working in “live mode”, then no void is possible since the approved authorization is immediately followed by a settle one. But some banks will require the processor to have the batch of all approved authorization sent to them (broadcasted) at a specific hour in the afternoon. In this case, the transaction can still be voided as the settle will not be included in the broadcast.
Refund: Also known as a Credit or credit return is the return of funds to the cardholder from the merchant account after the transaction was completed and settled. A refund is always linked to an initial transaction. A refund is issued based on the case, and in accordance with your refund and return policy. It is also possible to refund the amount partially but not more than the original amount charged and should be returned in the currency that the initial charge was made in. A transaction that was refunded cannot be chargedback by the cardholder.
OCT (Original credit transaction): Previously known as CFT. The OCT is reserved for certain merchants who are in need of the option to issue credit towards a card that did not necessarily originate the transaction, or is entitled to more than the amount charged (up to 50,000 units per day per Visa card for example). The transaction is completed by the card company (Visa/MasterCard) debiting the merchant account and crediting the cardholders.
Gaming and Forex merchants are the main industries which are allowed to process OCTs and for them, refunds are even frowned upon by the Acquiring banks since any returning of funds are assimilated which a withdrawal or a winning. However, merchants tend to prefer issuing refunds in order to protect these transactions from being chargedback since the OCT does not provide such a protection. Usually the Acquirers will allow a maximum of ~5% refund ratio to be issued on these accounts.
We hope you found this article interesting and feel free to contact us with any question it may have arisen. We felt that such a summary of the different types of transaction will only make clearer the next pieces which will go deeper into processing strategies you could implement
