Credit Card Processing Blog

Authorization is the process through which issuers approve or decline a card transaction. It is as an indication that funds are available in the account and the card has not been reported as lost or stolen. Typically, an authorization request is processed electronically and the merchant receives the issuer’s decision in seconds. The request can also be made over the phone, if the issuer’s authorization system is down for some reason, but this should be avoided, because such requests are expensive and a voice approval cannot be used in a chargeback re-presentment, if it comes to that.

Authorizations are required for all card-not-present transactions, regardless of the amount. An e-commerce or MO / TO transaction that has been processed without an authorization approval is subject to an automatic chargeback, with no recourse for the merchant. However, the rules for card-present authorizations are different and I have five tips for you on how to manage them.

5 Tips for Authorizing Card-Present Transactions

1. Authorize all transactions that are above your floor limit. Your floor limit is set by your payment processor and states the amount above which all of your credit card transactions must be authorized before being processed. There are no exceptions. Listed in the table below are the possible responses to your authorizations requests and their meanings:

2. For transactions that are below your floor limit, you can either:

• Not request an authorization, but compare the card number to the Card Recovery Bulletin (CRB), which would be done electronically or
• Request an authorization anyway.

3. If the card is listed in the CRB, you are required to:

• Not complete the transaction.
• Pick up the card, but only if it is safe to do so.
• Call your processor’s voice authorization center, state that the card number is listed in the CRB and ask for instructions.

4. Regardless of the amount, authorization approvals are required for:

• Expired cards.
• Manual cash.
• Unattended terminal transactions.

If you receive an approval, complete the transaction. Otherwise, request an alternative payment form.

5. Learn how to process partial authorizations and split-tender transactions.

• Partial authorizations enable issuers to approve amounts that are lower than the transaction amount when the available card balance is not sufficient to cover the full transaction amount, providing an alternative to a declined transaction. The benefit for the cardholder is that she is able to use up the remaining available balance on her card and then use another payment form, such as cash, check or another bank card for the remaining balance. All major credit card associations and companies support partial authorizations. Contact your point-of-sale (POS) vendor for information on how to do it.
• A split-tender transaction is the consequence of a partial authorization approval, occurring when a part of the sale’s amount is paid with a card and the other part – with some other form of payment (or tender). Typically, split-tender transactions are used to allow users of prepaid cards to spend the remaining balance of their card, even when it is lower than the full transaction amount. It is each merchant’s individual decision whether or not to accept split-tender transactions.

The above tips apply to magnetic-stripe card transactions. The rules for EMV (chip-and-PIN) authorizations are different, but U.S. merchants are not yet equipped to accept chip cards, so I have left them out.

The Takeaway

Authorizing card-present transactions is a fairly straightforward process. If your request is approved, your POS terminal will automatically print out a sales receipt for your customer to sign and complete the transaction. If a negative message or an alert is received, the terminal will display the response, no sales receipt will be printed and you will be prompted to take the appropriate action. Whatever the authorization response, however, you should treat your customer with courtesy and respect throughout the transaction.

Image credit: BenefitU.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).

MasterCard transactions are processed through the MasterCard Worldwide Network using the Authorization Platform, Global Clearing Management System (GCMS), and the MasterCard Settlement Account Management (S.A.M.) system. There are three stages in each card transaction and you should have at least a basic understanding of how the process works. The following article will help get you started.

Transaction Authorization

Every authorization request receives a response, in the form of a code, that directs the merchant on how to proceed with the transaction. The response always identifies one of the following actions that the merchant should take:

Partial Authorization Approvals

A partial authorization approval enables merchants and cardholders to complete debit and prepaid card sales in cases where the balance available on the card is less than the transaction amount. All U.S. debit and prepaid card issuers are now required to support partial approvals.

Issuers use partial approvals to authorize a portion of the transaction amount in the authorization request (which is submitted for the full amount) when the transaction amount is greater than the amount available on the debit or prepaid card, provided the point-of-sale (POS) terminal supports partial approvals. For automated fuel dispensers (AFDs), the partial approval amount may be greater than the one provided in the authorization request.

Once the issuer provides a partial approval, the processor typically sends a balance due message to the POS terminal and the cardholder can use a different payment method to pay the outstanding balance and complete the sale. This is known as a split tender transaction.

Clearing and Settlement

Clearing is the process of exchanging transaction data between processors and issuers. From the information provided in clearing, GCMS calculates the amounts for settlement. Clearing includes sending transactions from the processor to the issuer for posting to the cardholder’s account (which is known as “presentment”). GCMS gathers the information, edits it, assesses the appropriate fees, and sends it on to the appropriate receiver. The clearing messages contain data but do not actually exchange or transfer funds.

While clearing is the process of exchanging transaction data, the actual exchange of funds is a separate process, called settlement. These funds are exchanged daily between processors and issuers for the net value of the cleared transactions.

The Takeaway

It is important to understand that MasterCard, just like its rival Visa, is neither an issuer of the cards bearing its logo, nor a processor of transactions made with these cards. Both organizations are associations of member-banks, which are licensed to issue MasterCard and Visa cards and to acquire the associated transactions. The two associations facilitate the processing of these transactions and, when applicable, the transferring of settled funds between members. MasterCard and Visa are also the final arbiters of any disputes that their members are unable to resolve between themselves.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).

Now that Visa has made it mandatory for all U.S. processors to support chip-based transactions by April 1, 2013, we will need to start familiarizing ourselves with the new technology. In this post I will review the requirement for all EMV-accepting devices to support terminal risk management. Each point-of-sale (POS) device should be able to determine whether terminal risk management must be performed prior to sending an authorization decision to the card.

The two mandatory risk management checks for POS terminals are floor limit and random transaction selection.

Floor Limit

Floor limit is the transaction amount above which an authorization needs to be requested. Processors determine the floor limit for each of their merchants using Visa and MasterCard regulations, based on the country and merchant type.

Countries can implement different floor limits for chip and magnetic stripe transactions, so POS devices should be capable of supporting both. Alternatively, terminals can have an effective zero floor limit for mag-stripe transactions by forcing all of them online and use a floor limit for chip transactions.

Floor limits for mag-stripe transactions are not applicable for fallback transactions (where the mag-stripe is only used if the chip cannot be read), which all have a zero floor limit. If a mag-stripe fallback transaction cannot be processed online, a paper voucher or key entry processing is allowed with voice authorization. If a fallback transaction cannot be authorized, it must be terminated.

Random Transaction Selection

EMV terminals must support random transaction selection for online processing, which helps protect against counterfeit cards designed to operate exclusively offline. The POS device needs to be programmed to randomly select below-floor-limit transactions for online processing. The values are determined on a per-country basis and designed to achieve two goals:

• Preventing criminals from predicting a POS terminal’s online behavior and exploiting the floor limit.
• Providing adequate opportunities for transactions to be approved offline, depending on the issuer’s card controls.

There are two types of random selection:

• Random selection. Here a certain percentage of below-floor-limit transactions is sent online.
• Biased random selection. In this case a formula is used to determine whether a transaction goes online, with the probability increasing as the transaction amount approaches the floor limit.

Random transaction selection is based on three factors:

• Target percentage for random selection. This percentage (which can be anywhere between 0 and 99) designates the approximate ratio of transactions below the threshold value that the POS terminal sends online for authorization. It also designates the minimum percentage of above-threshold transactions to be sent online. A value of zero turns off the random transaction selection.
• Threshold value for biased random selection. Below this value (which can be anywhere between 0 and the floor limit amount), transactions are subject to random selection and above it – to biased random selection. If the threshold is zero, all transactions will be evaluated by biased random selection. If it is set at the floor limit, random selection is used.
• Maximum target for biased random selection. This value (anywhere between 0 and 99) is used to increase the ratio of selected transactions as the transaction amount approaches the floor limit. The higher the maximum target amount, the more likely that the transaction will go online.

The Takeaway

The POS terminal risk management rules, together with the card rules, are used to determine whether a given transaction should be approved offline, sent online for authorization, or declined offline. You will need to work with your processor and equipment vendor to ensure that your device is properly set up.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).

Credit card transactions can be processed in batches at the end of the day or in real time. The method selection is dependent on the payment acceptance environment, the processor’s capabilities and on local requirements. The transaction information can be captured either at the point-of-sale (POS) device or at the processor host.

In this post I will offer a cursory overview of the two processing methods.

Batch Processing

Batch processing (also known as batch clearing) involves the exchange of transaction information twice, which is why it is also referred to a dual message processing. In dual message processing, the authorization occurs at the time of the transaction, through only one message and then the clearance is done later through another message.

The clearing messages from the daily transactions are typically collected into a batch for the POS devices. At the end of the day the batch is sent to the processor as part of the end-of-day processing. Device-capture and processor host-capture systems typically use dual message processing.

Real Time Processing

In real time processing all transaction information flows online. If the final amount is known at the time of the authorization request, the same online message also provides the issuer with all the data needed to clear the transaction and post it to its cardholder’s account. This is why real time processing is also referred to as single message processing.

Real time processing merchants, specifically those in the travel, lodging and entertainment industries, can use an authorization message followed by a sales completion, instead of a full financial message. If that is the case, the process is very similar to the dual message one.

Batch and Real Time Processing Considerations

Gas stations and other card acceptance environments, where the final transaction amount is not known at the time of the authorization, typically use batch clearing. Those that use real time processing instead, request a status check first, followed by a clearing message when the final amount is known. Unlike batch clearing, this message can be sent as soon as the full amount is calculated.

Where a device-capture system is used, the POS terminal combines the authorization response with the information from the authorization request to create the clearing message. Where a processor host-capture system is used, the host keeps a copy of the authorization coming from the POS device, prior to sending the request for authorization, and uses this information along with the authorization response to create the clearing message. A device connected to a host-capture system can keep a shadow (copy) of the clearing batch for information purposes.

For devices using host capture, all transactions appear to be single message, as the processor is responsible for generating the clearing message. Although single message systems typically use full financial messages, they can also use an authorization followed by a clearing message.

The Takeaway

Typically, your processor will select the processing type for you and it is best to listen to their advice. Still, it is also advisable that you understand why your transactions are processed the way they are, so that you can set up your sales processing system correctly.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).

In most credit and debit card transactions the card is only presented for payment once the exact purchase amount is calculated. Then an authorization request is sent to the issuer for the transaction amount, an approval or decline is issued and the transaction process follows its regular course.

But what about transactions, such as fuel sales at gas stations, where the exact purchase amount is unknown at the time the card is swiped? This is where merchants use pre-authorizations to ensure there are sufficient funds on the card to pay for the fuel.

What Is Pre-authorization

Pre-authorization is a transaction authorization request for a pre-determined amount that is sent to the issuer before the final transaction amount is known. Used mainly at unattended point-of-sale (POS) terminals at gas stations, pre-authorizations enable merchants to check the availability of funds on their customers’ cards.

The pre-authorization amount is set by the merchant and can be $50, $75, $100 or more and is displayed on some POS terminals’ screens (you should be doing that too, if you aren’t doing it already). There is a maximum pre-authorization amount that is set on an acquirer level, based on merchant category and other factors, and that could be stated in your merchant processing agreement. If not, call your acquirer and ask what it is.

How Pre-authorizations Are Processed

There are two ways of processing pre-authorization requests:

• Using an authorization message that is followed by a partial reversal once the transaction is completed. In this case, after the customer swipes her card, an authorization request is sent to the issuer for a fixed amount (this is the maximum pre-authorization amount). Then, once the purchase is finalized and when the exact sale’s amount is known, a partial reversal is issued to correct the previously authorized amount.
• Using an authorization message that is followed by the sending of the exact sale’s amount in the clearing record. In this case, once the customer swipes her card, an authorization request is sent to the issuer for the maximum pre-authorization amount. What you need to be aware of here is that your customer’s credit line is reduced by the sum of the pre-authorization request and the exact transaction amount.

So let’s say that your customer has a $2,000 credit line on her card and has used $1,700 of it. If you process a $50 pre-authorization amount and then the customer purchases $50 worth of gas, the card’s available balance will be $200 ($2,000 – $50 – $50). The pre-authorization amount typically takes no more than a couple of days to be removed.

In both cases the transaction must be cleared within seven business days.

It should be noted that authorization requests for hotel or resort transactions are different from regular pre-authorizations, even though you can see them referred to as such. For one thing, there are no pre-set pre-authorization amounts for hotel transactions. The hotel will request an authorization approval for the entire estimated transaction amount, whatever it may be. Once the customer checks out, a partial authorization reversal will be requested if the initially authorized amount exceeds the final amount or an authorization approval will be requested for the amount above the originally approved one, if that is the case.

The Takeaway

If you own a gas station, you need to make sure that you understand how pre-authorizations work. Also, you need to make sure that your maximum pre-authorization amount is set high enough, so that not to inconvenience your customers.

I’ve never had any issues getting gas for any amount here in Boston, but I do remember that, while on a cross-country trip a few years ago, I could only get up to $50 in gas at some stations. I was driving a truck so that wasn’t nearly enough. Now, that’s a sure way to chase all truck drivers away from your gas station so don’t do it.

Get a personalized credit card rate for each of your transactions!

Get the lowest possible credit card processing rate for each individual transaction! Our interchange-plus pricing model gives you:

• Processing rates calculated separately for each transaction to ensure that not a single one of them is overcharged.
• No more mid-qualified and non-qualified fees.
• No fixed monthly fees.