Credit card pre-authorizations offer many benefits, yet many online merchants do not understand or take advantage of them. By pre-authorizing payments, fraud and processing costs are significantly reduced, while customer satisfaction is greatly improved.
Despite these benefits, most merchants are reluctant to pre-authorize payments because the entire pre-authorization process is confusing. Let us demystify this process so you can start reaping its benefits.
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Pre-authorizations are no different from other credit card transactions, although the exact process slightly varies among payment processors. However, they have the same requirements. For online payments, you would need:
When integrating your website with the payment gateway, specify the type of transaction you're processing. Most shopping cart administrative interfaces will have "full authorization" or "pre-authorization" options. Some shopping cart software may use terms like "capture" for full authorization and "reserve only" for pre-authorization.
Remember that this setting is an account-level setting that affects all the transactions in your online store. Once the settings are configured, you only need to wait for customers to pay for their credit card transactions.
Known as a "pre-auth" or "auth-only," this step deducts the desired amount from the customer's card once the merchant confirms the transaction. Most buyers are unaware of this because the funds are as good as spent when they pay for an order with their card.
However, these funds have yet to be charged to the customer's credit card. The funds are frozen, and the customer's "available balance" will drop by the pre-authorization amount even though the transaction will not appear in their credit card statement.
Funds are usually frozen for up to 5 - 7 days, depending on your Merchant Classification Code (MCC). Once the transaction is completed, i.e., the order has been delivered, and there are no returns, you can "capture" the payment.
A capture, also known as a "force," is the second step in the pre-authorization process. It is the most effortless process involving familiar interfaces.
Once a customer's payment is successfully processed in the payment gateway and the card is verified as a valid credit card, an "Approval Code" is provided to the merchant for later use. Original approval codes are valid for 30 days, but funds may no longer be available once the freeze expires after 5 - 7 days.
This happens when customers use the allocated funds for other purchases. If this happens, you must contact the cardholder and reprocess the payment.
When you're ready to capture your customer's payment, log in to your credit card processor's administrative interface. You should be familiar with the interface already since this is the same one you use to issue refunds or generate statements.
Head to the transaction in question and press the capture button. The funds will now be transferred to your account. Some advanced shopping carts also allow you to capture the payment from within the shopping cart administrative interface.
If you have this functionality, maximize it. This is better than capturing the payment in your credit card processor administrative interface because the records in your online store will be updated. It's not a significant issue. However, it provides a more seamless experience regarding syncing records.
Ideally, it would be best if you didn't let pre-authorizations expire because they can cause confusion and create a bad customer experience. However, these situations happen, and you should know what to do if it happens to you.
Technically, pre-authorization approval codes are valid for 30 days, although funds are frozen for only up to 5 or 7 days. When the pre-authorization expires, issue a new charge to the customer's card.
Most credit card processors will have the option to create a new transaction using the card with the expired pre-authorization. You can also talk to your credit card processor to reprocess the credit card.
Of course, make sure your customer knows what's happening. Despite the inconvenience of explaining the situation to your customer, in the customer's mind, you're further ahead since you've already processed the order and the items have been shipped.
Take note that once the pre-authorized period expires, the card may be declined due to insufficient funds. This happened when the customer made other credit card transactions that depleted their available funds. This rarely happens, though, and is often only a minor issue.
Setting up pre-authorized payments is simple and easy. Almost all payment processors and shopping cart software support pre-authorizations. It's only a matter of activating the payment gateway settings and remembering to capture the payment once the order has been processed.
Read through our blogs at Processing Card today to get more tips and learn new strategies to maximize the use of multiple payment processing solutions.
Florence Carpenter is passionate about ensuring that the process of opening merchant accounts is as straightforward as possible. She graduated from the University of Michigan with a bachelor’s degree in Marketing.
