From a consumer’s perspective, card payments are a very straightforward and quick experience. A typical Visa or Mastercard transaction occurs in approximately one to three seconds. However, when you unpack what happens behind the scenes in the space of that short moment, you find a series of processes where an authorisation request is passed from a merchant’s website or point of sale (POS) terminal to various entities and then back again.
Capture vs authorisation
While authorisation depends on whether a customer has sufficient funds in their account and various other checks and balances, card capture – which is when the funds are actually transferred to the merchant’s account – depends not only on your agreement with your payment service provider (PSP) but also on the type of business you run.
Here’s a diagram to sum up the payment process:
Read on for a detailed explanation of authorisation and capture as part of the payment process.
What is authorisation?
The authorisation requires multiple entities to work together to determine whether a transaction is valid. These entities are the cardholder, the merchant, the acquirer, the card schemes (Visa, Mastercard, American Express etc.) and the issuer (the bank that issued the customer’s card).
Let’s walk through the payment authorisation process step by step:
- A customer attempts to make a payment on a merchant’s website or POS terminal.
- The merchant’s system sends a payment request to the emerchantpay gateway which then sends an authorisation request to the acquiring bank.
- The authorisation request is passed from the acquiring bank to the card schemes to the customer’s issuing bank (issuer).
- The issuer determines whether or not to approve the authorisation request.
- This information is then passed back to the merchant in reverse order.
- If the issuer has not authorised the transaction, the merchant and cardholder will see an error code (in card present transactions, this will appear on the merchant’s POS terminal). If everything is fine, the transaction is authorised and the total amount deducted and held from the customer’s account.
At this point, it is important to note that the funds have not yet been transferred to the merchant’s account, but they have been frozen (or put ‘on hold’) in the customer’s account.
This is where capturing comes in – when a merchant notifies the acquirer that the transaction has been completed, depending on their agreement with their PSP, the funds can be transferred to the merchant account. In the payments industry, we refer to this final process as ‘card capture’.
What is pre-authorisation?
Pre-authorisation is a type of authorisation that’s necessary for certain businesses where the final transaction amount may change between the time that a customer has made an initial payment and the time when the funds are captured by a merchant.
A prime example is hotel bookings. Upon check-in, a hotel pre-authorises the cost of the room for the length of a customer’s stay, meaning the initial amount is blocked from the customer’s account. This is done to authenticate the card and verify that the cardholder has sufficient funds available. But consider a typical hotel stay – you may want room service, something from the mini fridge, or you may even want to extend your stay. All these add-ons drive up the final bill paid at the end of your stay.
In this scenario, the final amount can be adjusted thanks to the pre-authorisation and eventually captured by the merchant.
What is card capture?
Card capture is the process of funds being released from a customer to a merchant.
As transactions always follow the rule of ‘charge now, capture later’, what follows the authorisation or pre-authorisation of a transaction is what’s called an ‘honour period’. This could be three days, a week, or even 40 days (which is the maximum that Visa allows). The actual timeframe when the funds will reach the merchant’s account depends on your agreement with your PSP and the type of business you run.
For a typical eCommerce transaction, for example, it is recommended to authorise the amount on incoming orders and capture it when shipping the goods. The customer will not actually be billed until the capture has taken place, but the amount is reserved, and the customer’s card limit is reduced.
Travel merchants typically have much longer honour periods because there is a higher risk of cancellation and last-minute changes among other factors. Ticketed events are another example, because a customer may purchase a ticket months before an event is scheduled. The extended honour period reflects the uncertainty around the many things that could change in that time. In business terms, this is called ‘delayed order fulfillment’.
Why is ‘authorise and capture’ necessary?
Both these processes are ultimately in place to protect merchants from financial liability and losses. Quick capture, which involves a reduced honour period, opens the door to fraud and chargebacks, both of which put immense strains on a business.
How emerchantpay can help
With almost 20 years of experience in the payments industry, emerchantpay can offer a range of authorisations, pre-authorisations, honour periods and more in order to take you through the full cycle of payments. We’ve also created an insightful video to help you demystify the payments ecosystem.
To discuss optimising your payments performance, get in touch with our team of payments experts today.