A credit card purchase (sometimes called a sale) is the most common and straightforward transaction type. Wanting to receive payment for a purchase from their customer, a merchant will process a credit card sale.
The credit card information (gathered by either card-present or card-not-present means) along with the amount of the sale is sent to the processor. The processor then sends all the transaction information to the card network, which then asks the customer’s issuing bank to approve the transaction and requested amount. If approved, an approval code is returned to the merchant from the processor. This is achieved in real-time, meaning that within a few seconds, the transaction was processed and approved by the card network.
A pre-authorization (sometimes called a pre-auth or just authorization) is very similar to a purchase, but it does not complete the sale. Just like a purchase, the transaction is processed in real-time, and an approval code is provided to the merchant for the desired amount. However, the funds are not debited from the cardholder, but instead “frozen” or “reserved” for between 7 to 10 days. When the merchant is ready to “capture” the pre-approved funds, the merchant will submit a capture request to complete the sale. This method is often used for hotels, car rentals, and gas stations, where the merchant needs to ensure that a certain amount is available on the card, without charging the final amount until the service is complete or the charge is to be incurred. If a pre-authorization is not captured within seven days, the funds are unfrozen and released back to the cardholder.
Also known as a force, a capture is the second step after a credit card pre-authorization. For a capture to be successful, it must include the original approval code generated by the pre-authorization. Captures can be completed up to 30 days after the original pre-authorization, but funds are only frozen for the first 7 days. This means that while a capture transaction could be performed on the 20th day, there is no guarantee that the cardholder will still have the funds available on their credit card.
Captures can be up to the full pre-authorization amount or a lesser amount, but not for more than the original pre-authorization. For example, most gas station pumps do a pre-authorization for $200, but the final capture amount (once you complete pumping your gas) is usually for a smaller amount. The uncaptured amount will be released back to the card.
A void is used to cancel a previously authorized transaction. For example, if the incorrect amount was entered for a credit card purchase, the transaction can be voided and then processed again for the correct amount. A void transaction will be made in real-time to the card network, telling the customer’s issuing bank to cancel the transaction and approval code. The customer will not be charged for the original transaction if it is voided. Voiding the transaction prevents interchange fees from being charged, but if it is processed as a refund, then you will not get the interchange fees back for that transaction.
A void can only be performed if the batch has not yet been settled (we’ll talk more about batches later). If the batch has already been settled, a void can no longer be performed, and a refund would need to be performed instead.
Unlike a void, a refund can be performed after a batch has been settled. A refund is essentially a “negative” purchase, very similar to a stand-alone purchase transaction but with a negative amount instead of a positive. It is always recommended to void the transaction if possible, instead of performing a refund, because a voided transaction will not cause the customer to be charged for the original sale. If a refund is processed, the customer will see both the original charge as well as the refunded transaction.
The refund amount will be debited from the merchant (or from the most recent batch total) and sent back to the customer. While refunds are processed in real-time, the customer’s issuing bank can take up to 10 business days to display it on the customer’s statement.
A verification is a $0 transaction. This is typically processed in a card-not-present scenario, where the merchant wants to verify the credit card but not actually process an amount at that time. Often, this transaction method is used to “tokenize” the credit card for later use. When you do a verification, you are checking the validity of the credit card number, expiry date, and card security. However, since no amount is sent, what is not being verified is the cardholder’s available balance.
When a transaction is approved, it is the customer’s issuing bank, not the processor or the card network, that is approving the transaction. An approval means that the credit card number and expiry dates are valid, the customer has enough credit for the transaction amount requested, and that the card has not been reported as stolen or compromised. It is important to note that an approval is not an absolute guarantee of the transacted funds. There is always the chance a chargeback is filed at a later date by the cardholder, either because their card was stolen or because of a dispute with the merchant, which we’ll get into in a later section.