To better explain an online credit card transaction you should be aware that an online credit card transaction is actually made up of two parts: Authorization and then Capture.
Authorize Only will check the card for validity but not charge the credit card. While Authorize and Capture will check the card for validity and then charge the card as well.
What is a credit card Authorization?
A credit card authorization, as the name suggests, is an authorization for a specific amount of funds from a credit cardholder. As a merchant when you process a transaction on behalf of your customer an initial credit card authorization is sent to check if the customer’s credit card is valid and that he or she has sufficient funds to complete the online transaction. Assuming the customer has sufficient funds the total amount of the online transaction is then held and deducted from the customer’s credit limit.
It is important to note that even though the funds are held and deducted from the customer’s credit limit that the funds are not automatically transferred to the merchant’s settlement account. So if the customer has been deducted the online transaction amount and they are not able to access the funds then how does the merchant retrieve the amount owed?
What is a credit card Capture?
The credit card Capture is the missing piece of the puzzle that allows a merchant to have the funds that are owed to him transferred from the customer’s account to the merchant’s account. As you can see the online transaction amount does not reach the merchant’s settlement account until the funds are captured. What is interesting is that a merchant specifies the total amount to capture from the customer’s account.
This means that if a credit card Authorization was issued for $1000 from the customer’s account that the merchant could issue multiple credit card Capture requests until the $1000 amount is reached. For example, the merchant may issue 2 x $500 Capture requests in order to retrieve the total online transaction amount owed.
How long does a credit card Authorization last?
This is a very good question and it would not hurt for everybody to read this section. A credit card Authorization has a specific time frame in which the merchant is able to issue a credit card Capture to retrieve their funds from the customer’s account. Unfortunately, this time frame is not set in stone and differs depending on the card scheme (VISA, MasterCard, American Express, JCB, Diners etc.) Generally speaking, a credit card Authorization will become void after 7-10 days or so.
If a credit card Authorization has not been Captured by the merchant by the specific time frame specified by the particular card scheme the credit card Authorization becomes void. The funds are then no longer held from the customer’s account and are put back into the customer’s account.
Using the example above, if a credit card Authorization was issued for $1000 and the merchant had not Captured these funds from the customer’s account in the specific time frame then the $1000 would be credited back to the customer’s account and the $1000 would be made available to the customer to spend again.
Credit card Authorization and Capture
Plain and simple every online credit card transaction that takes place consists of a credit card Authorization and credit card Capture. At this time, the funds are transferred from the customer’s account to your company’s settlement account.