Explaining Pre-Authorization Settlement for Credit Card Transactions

In today’s world, it’s important to understand the different types of credit card transactions to ensure your business is taking advantage of all of the benefits available. One such transaction is pre-authorization settlement, which can be beneficial for both merchants and customers alike. In this complete guide, we’ll cover everything you need to know about pre-authorization settlement for credit card transactions.

Pre-authorization settlement is a crucial step in the credit card transaction process. It’s a way for merchants to verify the availability of funds on a customer’s card before the transaction is finalized. This is essential for preventing fraudulent activity and ensuring that merchants have enough funds to cover the transaction.

When a customer swipes their credit card, the transaction goes through a pre-authorization process. During this process, the merchant sends a request to the card issuer for authorization to charge the customer’s account. The card issuer then verifies the funds are available and places a hold on the appropriate amount.

Once the pre-authorization process is complete, the transaction can be settled. Settlement occurs when the funds are actually transferred from the customer’s account to the merchant’s account. The process of settlement is typically done at the end of the day.

For more information on the pre-authorization process, merchants can refer to the Payment Card Industry Data Security Standard (PCI DSS) guidelines. These guidelines outline the security standards and best practices that businesses should implement to safeguard their customer’s payment data.

Pre-authorization settlement is available on all credit card transactions. The funds that are pre-authorized are typically held on the customer’s account for 24-72 hours. During this time, the merchant has the option to reject or accept the transaction. If the merchant accepts the transaction, the hold on the funds is released and the funds are transferred to the business’ bank account.

Pre-authorization settlement is used by merchants to ensure that transactions are legitimized before they are finalized, which can help prevent chargebacks and other fraudulent activities. This process is especially important for high-risk industries, which are industries that are more likely to have fraudulent transactions due to the nature of their business.

Pre-authorization settlement is commonly used in various industries, including hospitality, automotive, healthcare, and retail. In the hospitality industry, pre-authorization is used to reserve a room and cover any room damage. In the automotive industry, pre-authorization is used to reserve a rental car and cover any damages. In the healthcare industry, pre-authorization is used to verify insurance coverage and reduce the risk of payment disputes. Finally, in the retail industry, pre-authorization is used to cover the cost of large purchases and ensure funds are available before the transaction is finalized.

By using pre-authorization settlement, merchants can enjoy several benefits, including reduced chargebacks and improved cash flow. By verifying funds are available, businesses can avoid chargebacks, which can be costly and negatively affect a merchant’s reputation. Pre-authorization settlement can also improve cash flow by ensuring that funds are available to cover transactions before they are finalized. This can help businesses avoid overdraft fees and other financial penalties.

To ensure the best possible results with pre-authorization settlement, merchants should ensure they have the latest point-of-sale technology and follow best practices for payment processing. These best practices include encrypting payment data, using secure payment gateways, and ensuring that all devices that process card payments are PCI DSS compliant.

If a pre-authorization expires before settlement takes place, the hold on funds is automatically released, and the funds become available for the customer to use again. If the merchant still wants to complete the transaction, they must start the pre-authorization settlement process again. This can be inconvenient for merchants and customers alike but is essential for ensuring the transaction is legitimate.

Another type of credit card transaction that merchants should be aware of is AFT transactions. AFT stands for Automated Fuel Transactions and is commonly used in the fuel industry for pay-at-the-pump transactions. AFT transactions are similar to pre-authorization settlements, but the funds that are held are typically lower and are only held for a shorter period of time.

Merchant Advice Codes (MAC) are codes provided to merchants that provide more detailed information about a transaction than what is provided on a standard credit card receipt. These codes can be used to track transaction information, including the type of transaction and the amount of funds held during the pre-authorization process.

Credit card authorization is the process by which a merchant verifies the validity of a customer’s credit card. This process ensures that funds are available to cover the transaction. Authorization typically occurs during the pre-authorization process, but can also occur during settlement if a merchant discovers an issue with the transaction.

It’s important for merchants to understand that authorization does not guarantee payment. There are several reasons why a transaction may be declined or reversed, including insufficient funds, an expired card, or a suspicious transaction. Merchants may also be subject to chargebacks, which occur when a customer disputes a transaction or reports it as fraudulent. To minimize the risk of chargebacks and other payment issues, merchants should follow best practices for payment processing and implement security measures such as EMV chip readers and tokenization.

For more information on credit card authorization and pre-authorization settlement, merchants can refer to resources provided by credit card issuers, payment processors, and industry organizations. These resources can include training programs, best practices guidelines, and compliance checklists. Merchants should also stay informed about any updates or changes to regulations that may affect payment processing.

Pre-authorization settlement is a crucial step in the credit card transaction process that benefits both merchants and customers. By understanding how pre-authorization settlement works and following best practices for payment processing, businesses can reduce the risk of fraudulent activity and chargebacks while improving cash flow. Merchants should stay informed about any updates to regulations and guidelines to ensure they are providing the best possible payment processing services to their customers.