Have you ever wondered exactly what happens when you hand over your credit card details online for a purchase? You may have a thorough understanding of the process flow of an online credit card transaction but what happens behind the scenes? Understanding exactly what happens when a credit card is processed online is important and that is why any merchant operating an online store should read this article.
To better explain an online credit card transaction a merchant should be aware that an online credit card transaction is actually made up of two parts: Authorization and then Capture.
What is a credit card Authorization?
A credit card authorization, as the name suggests, is an authorization for a specific amount of funds from a credit card holder. As a merchant when you process a transaction on behalf of your customer an initial credit card authorization is sent to check if the customer’s credit card is valid and that he or she has sufficient funds to complete the online transaction. Assuming the customer has sufficient funds the total amount of the online transaction is then held and deducted from the customer’s credit limit.
It is important to note that even though the funds are held and deducted from the customer’s credit limit that the funds are not automatically transferred to the merchant’s settlement account. So if the customer has been deducted the online transaction amount and they are not able to access the funds then how does the merchant retrieve the amount owed?
What is a credit card Capture?
The credit card Capture is the missing piece of the puzzle that allows a merchant to have the funds that are owed to him transferred from the customer’s account to the merchant’s account. As you can see the online transaction amount does not reach the merchant’s settlement account until the funds are captured. What is interesting is that a merchant specifies the total amount to capture from the customer’s account.
This means that if a credit card Authorization was issued for $10 from the customer’s account that the merchant could issue multiple credit card Capture requests until the $10 amount is reached. For example, the merchant may issue 5 x $2 Capture requests in order to retrieve the total online transaction amount owed.
How long does a credit card Authorization last?
This is a very good question and it would not hurt for everybody to read this section. A credit card Authorization has a specific time frame in which the merchant is able to issue a credit card Capture to retrieve their funds from the customer’s account. This time frame unfortunately is not set in stone and differs depending on the card scheme (VISA, MasterCard, American Express, JCB, Diners etc.) Generally speaking a credit card Authorization will become void after 10 days or so.
If a credit card Authorization has not been Captured by the merchant by the specific time frame specified by the particular card scheme the credit card Authorization becomes void. The funds are then no longer held from the customer’s account and are put back into the customer’s account.
Using the example above, if a credit card Authorization was issued for $10 and the merchant had not Captured these funds from the customer’s account in the specific time frame then the $10 would be credited back to the customer’s account and the $10 would be made available to the customer to spend again.
Credit card Authorization and Capture
At this point some merchants may be wondering why they have never been required to Capture funds. They simply have an online merchant facility which processes transactions and the funds are then settled to their merchant account. This is the scenario that is most common and generally speaking merchants do not have to worry about Capturing funds on their own.
Plain and simple every online credit card transaction that takes place consists of a credit card Authorization and credit card Capture. In most cases a credit card Capture is automatically sent on behalf of the merchant by the merchant’s acquiring Bank and this is why merchant’s are not required to manually run this step by themselves.
Who needs credit card Authorization and Capture?
There are specific business models that will require the ability to have control over when they issue a credit card Authorization and credit card Capture. A simple example of this would be a computer repair company that sent out employees to fix computer problems. Assuming they have a service cost of $50 this is how the process would look:
1. The Customer books computer repair specialist for $50
2. The Computer repair company issues a credit card Authorization for $50 to the customer’s credit card
3. The credit card Authorization is successful and therefore the Computer repair company knows that the Customer has the funds
4. A computer repair specialist is sent to the Customer’s house on the booking date which happens to be three days later
5. The computer repair specialists fixes the customer’s issue and notifies head office that the job has been completed
6. The computer repair company issues a credit card Capture for $50 from the customer’s credit card
7. The $50 is then transferred from the customer’s account to the computer repair company’s settlement account
This is a simple scenario in which the merchant can benefit from having control over when they issue a credit card Authorization and credit card Capture.