Leveraging the Posture of a Transaction for Advanced Processing
Fun fact: Credit cards have been around for awhile now. So long in fact that they predate computers entering into every aspect of our personal and business lives. Another fun fact: Banks and financial institutions are loath to update systems and processes if there isn’t a very pressing need to do so. These two factors have led to a complicated system which makes little sense… until you remember that these processes came before computers and instant communication became as ubiquitous as it is today.
In this guide we will:
- Go over the history of credit card processing as it relates to authorization and capture
- Discuss how this can be used for holding funds, verifying credit limits and expedite transaction reversals (i.e. releasing held funds)
While it is recommended for any developer not already familiar with these concepts to review this material, the primary industries that benefit from these concepts are going to be:
- Distributors and E-commerce Merchants
- Rental Agencies
The transaction postures in PayJunction mostly use common card processing terms. In order to better differentiate we will use the lowercase spelling to indicate the general meaning (e.g. “capture”) and the uppercase spelling to indicate the transaction posture in PayJunction (e.g. “CAPTURE”). Definitions for both use cases are provided below:
- Transaction Posture
- The temporary or final state of a transaction, dependant upon its settlement status.
- The processing stage at which a card issuer approves and reserves the funds for a requested payment submitted by the merchant.
- The transaction posture in PayJunction indicating the transaction has been authorized by the issuer, but will not be included in the batch for settlement.
- The processing stage where the transactions that are to be funded are sent to the payment processor for settlement.
- The transaction posture in PayJunction indicating the transaction should be included in the batch at settlement.
- To remove a transaction from the list of authorizations to capture.
- The transaction posture in PayJunction indicating the transaction should be cancelled when the currently open batch is settled.
- Settle / Settled / Settlement
- The processing stage where the payment processor and card issuing bank confirm the payment details and schedules the transfer of funds between the bank accounts.
- The transaction posture in PayJunction indicating the transaction has been finalized and no further posture or amount changes can be made.
So how did credit card processing work in the days prior to computers? Through phone calls for the most part. The original cards had numbers printed on them, but no chip to dip or magnetic stripe to swipe. Merchants would call the bank which issued the card, read off the card number and give the bank teller the amount they wanted to process. The teller would confirm the amount was available, reduce the available credit in the account, and then provide the approval code used to capture the funds.
While computers now handle the bulk of the work, the overall process remains largely unchanged. Instead of the merchant calling and reading the number off the card, they dip or swipe the card into a terminal. The terminal “calls” the card issuing bank with information about the transaction and the merchant processing it, which then responds with an approval code or a decline message. This is the Authorization stage of the transaction, where funds are approved and held, but not yet transferred.
If the cardholder decided to move forward with the sale, a second phone call would be placed to “capture” the previously approved funds. In order to save on telco charges, merchants would normally make one phone call to settle all open transactions for the day, or as it came to be called, their “batch” of transactions.
The Benefits of Delaying Capture
Delaying the capture of a transaction past 7 days can have deleterious effects such as:
Therefore PayJunction automatically voids any transaction 7 days or older if left uncaptured. If funds need to be held for longer than 7 days a new transaction should be processed to obtain a new authorization code.
- Increasing the cost to process a transaction
- Rejection of the transaction at settlement
- Issuer Chargebacks
So what is the advantage here, and for whom? We’ve already noted this is useful for hotels, restaurants, bars, distributors and ecommerce merchants but why?
Tips & Incidental Charges
Merchant Categories: Restaurants/Bars/Hotels
If you make a purchase on a payment card the card issuing bank usually offers a service to look up your statement online and see the transaction right away. But, if you look closely, you will find that it is listed as “Pending” or “Processing” or “Awaiting Completion by Merchant”. This is because the bank has authorized the charge but the funds have not been captured yet. If this transaction was from a restaurant, bar, or hotel it might even display a message stating that the final transaction amount may change.
Card issuers and associations already know that these industries commonly add tips after authorizing the base amount, or in the case of hotels, incidental charges. Per the specific rules from MasterCard, merchants are automatically allowed to capture up to 20% of the original transaction if they are in the restaurant, bar or hotel categories.
Voids Process Faster than Refunds
Merchant Categories: Distributors/E-commerce
As we stated in the history above, even though the bulk of the labor is now performed by computers, transactions are not instantaneous. In fact, it normally takes 3-5 business days for the banks to finalize a payment card transaction and actually transfer the funds from one bank account to another. When you refund a card, the funds are transferred from the merchant’s bank account to the cardholder’s debit or credit account with the issuer. Since there is no authorization phase when processing a refund, the cardholder will not see the available balance adjustment until the funds are actually put in the account, 3-5 business days later.
A void on the other hand simply cancels the transaction before funds are moved. In PayJunction, if a transaction is left as VOID when the open batch settles, an authorization reversal is sent to the issuer to remove the hold on the funds in the cardholder’s payment account. If the card is a debit card the reversal should be processed immediately by the issuer. While the majority of banks do not process reversals immediately for credit card accounts, it generally only takes 1-3 business days to reflect on a cardholder’s statement.
A transaction cannot be voided if it has already been captured at settlement, so delaying the capture allows us to process a void at a later date. This is useful for distributors and e-commerce merchants whom might not be able to fulfill an order after it is placed. Many shopping carts, including the ever popular Magento, automatically processes the authorization but does not set the transaction to CAPTURE until the order has been marked as complete in the shopping cart for this exact reason.
You Can Capture Less than you Authorize
If you have ever rented a vehicle you’ve probably already been introduced to this concept. Occasionally a merchant wants to do business with a cardholder, but is unable to determine the final amount that will need to be charged. Another example might be a contractor who won’t know the final amount to charge until the work is complete and the billable hours added up.
In the above cases you might not want to begin service until you verify that the customer has the funds to cover the expenses that accrue. By authorizing a certain amount, you can be reasonably sure that the customer has the necessary credit or funds in their debit card account to cover the cost of the work being commissioned.