How to Process a Card for Payment

Processing a card payment may seem fairly simple when only viewing the physical act of swiping a debit or credit card through a terminal or inputting the card numbers into software. The truth is that once set up correctly, processing payments should be simple, error proof and allow employees to focus on serving the customers.

The trick then lies in having the correct professional setup that matches the business needs, because below the surface the actual electronic process of authorizing and settling credit cards is far from simple.

 

The Two Parts to Card Processing: Authorization & Settlement

In the traditional sense, there are two parts to every credit or debit card transaction. This includes an authorization and a settlement. Both steps are required in order to charge a bank card, and depending on the hardware, software or service company, terminology can vary slightly so it is important to understand the fundamental steps in the process.

– To learn about auth/capture and settlement see our Capture and Settlement post

– To learn about authorizations continue reading below

 

Authorization Transaction

Authorization from Wikipedia:  “Authorization hold (also card authorisation, preauthorization, or preauth) is the practice within the banking industry of authorizing electronic transactions done with a debit card or credit card and holding this balance as unavailable either until the merchant clears the transaction (also called settlement), or the hold falls off.”

An authorization in simple terms is communication with the card issuing bank (ie Chase, BoA, Wells Fargo, etc.) that is looking for approval or denial to run a transaction on the card. Response codes are transmitted that are usually 6 digits and are recorded within the hardware or software performing the transaction. Also if configured correctly AVS and CVV2 codes are transmitted and recorded. These are security measures that are used to protect the financial intuition and merchant from fraudulent activity. It is important to note that when a sale is authorized, the sale amount is placed against available credit or funds and is not actually removed from the balance until settlement is performed.

 

Criteria For Authorization Approval

• Is the card number valid?
• Is the expiration date submitted valid?
• Has the card been reported as lost or stolen?
• Is there enough available credit or balance on the card?

In traditional credit card processing, if all the conditions above are met correctly, the transaction information is held in queue and then must be settled or batched via a manual or automated process at the close of business or other allotted time. There is however another option and is widely used both in online sales and also with gas stations, rental businesses and in the bar and night club industry. This is the process of Authorize and Capture and has been adopted in response to Visa’s initiation of the misuse of authorization fee.

– To learn about auth/capture and settlement see Capture and Settlement

– To learn about misuse of authorization see Misuse of Authorization