Payments : Demystifying Authorization and Capture

Authorization is an act of authorizing a payment with a card issuer.

When a customer swipes/taps/key the transaction at merchant website/POS terminal/app, this results in in the act of Authorization.

Behind the scene, the transaction flows like this:

1.       Transaction is initiated at the merchant terminal.

2.       Merchant sends the information to acquirer/processor asking for transaction to be authorized.

3.       Acquirer or processor sends the information to card network, such as MasterCard, Visa, Amex, Discover and many others in international regions.

4.       Card network sends the information to card issuer and card issuer makes the decision. The card issuers check for variety of compliances, credit and fraud risk controls and make the authorization decision.

5.       Once card issuer makes the decision, an authorization code travels through same channel back to merchant with an approval or a decline with an error code (more on how optimizing error code can help with better customer resolution)

Amazingly, all of this happens within 2-3 seconds.

Customer experience:

-          If the transaction is approved, customer gets the goods/services, if declined customer needs to use alternate methods.

-          For the customer, the hold is placed on the money in his/her account until the transaction is captured. Most of the issuing banks have hold period strategy to optimize for customer experience and reduce fraud losses (more on this later)

-          To optimize for the servicing cost, many of the issuers don’t allow the customer to file the dispute on a non-captured transaction.

With this stage, the real financial money hasn’t yet moved between issuing bank to the merchant.

Payment Capture:

After the transaction is authorized, the merchant must capture the transaction with the card issuer to gets the funds.

Merchant must capture the transaction within 7 days, else issuer might drop the authorization code and has ability to issue chargebacks.  Based on my experience, 90% of the transactions get captured within 2-3 business days.

With automated systems, payments are often captured immediately after authorization, unless merchant specify a delay between authorization and capture. Thus, a “delayed capture” reflects the time period merchant select between payment authorization and capture.

Let’s see how certain industries behave in terms of amount and duration between authorization and capture:

1.       Fuel/Gas: Merchant pre-authorizes for higher amount and then capture for the exact amount you have filled fuel for.  Can you imagine if Fuel merchant only pre-authorize for $1 and later allow to fill the fuel for $50. What will happen? 

2.       Hotels/ Car rentals: Authorize for certain amount, but capture can be different due to extension of stay, ancillary services etc. 

3.       Restaurants: Tips lead to capture amount to be higher than authorization amount. 

4.       Fraud screening: Merchant can opt to chose controls around delayed capture to ensure that the buyer order is not fraudulent.

Network rules allow for capture amount to be 15% higher than the authorization amount or certain absolute $ threshold.

Capabilities required for issuer:

• ISO messages coding and decoding(more on it later)  
• Duration to hold the authorized amount in user account, especially for car rentals/hotels transactions.
• Ability to match authorization with the capture. The match rate generally varies between 98%-99%. However, for the ~1% of transactions, issuer has right to issue Forced Post chargeback to the merchant.

Things merchant can do to avoid Forced post chargebacks:

-          Capture the transaction using the authorization code being issued at the time of authorization.

-          Ensure Capture amount is per network guidelines.

-          In case of split funding transaction, provide evidence of the entire transaction with the relevant authorization and invoice description.