Efficient payment processing is a top priority for any company selling online, regardless of what you’re selling. When your customer goes to check out, their payment must be error free, friction free, and a pleasant experience.
Any unnecessary barriers between your customer and a complete payment subtracts from their experience with your brand and reduces the likelihood they’ll either complete the transaction or return again next time.
Optimizing this payment experience on the front end (customers) and back end (you) can be challenging for business owners simply for all the variables involved. There are out-of-the-box payment systems and custom solutions alike to help you accommodate the sheer number of payment transaction types and determine how they affect your business.
Before you make a decision on what payment solution is right for you, it’s well worth getting familiar with the seven core payment transaction types that may affect your decision. Let’s explore.
Once a customer lands on your e-commerce site (for example), browses your products or services, makes their selection, and adds it to their cart, it’s time to check out. In contrast to a cash payment, an all digital transaction process like this requires a few more pieces of information from your customer to initiate and validate the sale:
- billing information
- card number
- expiration date
- security code (CVV)
With all their information provided, the charge/sale transaction has been initiated. In most cases, your payment gateway validates and captures your customer’s funds and payments in a single call.
It’s worth noting there are payment processors, gateways, and solutions that do both. In this case, your gateway “calls” the processor to transfer various payment data and confirm the validity of the payment with your customer’s card issuer.
Assuming a successful call, the card issuer will transfer the secured funds once the settlement process occurs. In a charge/sale, authorization and capture occurs in one call, however the settlement tends to occur later behind the scenes. As the merchant, you will receive a transaction ID from the gateway or processor for potential future requirements, like issuing a refund.
Pre-Authorization and Authorization (“Pre-auth/Auth”)
In certain situations, credit and debit card transactions have to pass through authorization (auth) or pre-authorization (pre-auth) to validate the information attached to a card and place a hold on your customer’s funds. Auth involves more steps than your standard charge/sale transaction above and requires two calls to the processor, which increases the complexity of the transaction as the auth must then be captured or voided.
Let’s say your customer wants to buy an item for $30, with $3 in tax, and $10 in shipping, the auth amount would be $43. When they run their card, the gateway/processor puts a hold on those funds to reserve them for this purchase, while making them unavailable for other uses. Depending on the processing system, this hold can last up to three days.
In some cases, the processor/gateway may authorize a higher amount than the transaction total as a safeguard against undercharging. This is common with gas stations where the final sale amount won’t be known until the fuel has been dispensed.
Another pre-auth or auth use case is for recurring transactions, like if you sell a subscription service. As the merchant, you might process $1.00 to validate your customer’s card is good for future payments and store it. The upside is you get to confirm the payment method, but the downside is the $1.00 will linger until the hold period expires or you issue a reversal (see Payment Reversal below).
Another factor to consider is that the auth transaction may show up as an unexpected alert on the customer’s account, making them wary of what’s going on with their funds that they may not have intentionally approved.
Required: An auth typically just requires your customer’s full card number, CVV, and cardholder information, as well as the purchase amount.
“Capturing” is a payment transaction type referring to securing funds previously authorized for transfer. Once the capture is final, your payment processor can transfer the funds during the standard settlement process. In nearly all circumstances, the capture will be for the amount previously authorized, although certain types of transactions (such as buying gas above) will often capture less than the authorized amount. There is also a risk that the capture will fail, but the previous authorization and validation of cardholder information make this very rare.
Required: A capture call only requires the original auth ID or transaction ID, as well as the purchase amount.
A reversal is precisely what it sounds like – a reversal of a successful auth or pre-auth transaction where your customer’s funds have been put on hold but not deposited into your account yet. This is different than a refund, which we’ll cover further down.
A reversal typically removes the hold placed on your customer’s funds, but can also be used in cases where there’s a smaller charge for validation purposes only.
Required: In most instances, reversals only require the original authorization ID or transaction ID and will not require the customer’s personal information, card number, or CVV.
Customers can often change their minds, and sometimes you’re in the middle of processing a customer’s purchase when this happens. Thankfully, a void transaction can help prevent funds from being transferred instead of issuing a refund later – which comes at additional cost to you. A “void” is simply a canceled transaction before funds are moved or settled, and if done at the right time, you can avoid transaction fees that come with refunds.
Required: To void a sale, merchants only need the original transaction ID.
No merchant likes issuing refunds, but they happen for a wide range of reasons and are to be expected in the world of online payment processing. It’s standard practice to take the item back and credit the customer’s card within your refund policy.
In a refund, your customer’s money has already been authorized, captured and settled – meaning you have to completely undo the payment you just processed and return the full funds. A few things to note about payment refunds:
- Refunds always return the money to the original card, so your customers cannot move money from one card to another.
- Refunds come at a cost to you, the merchant.
- You may also be at the mercy of the payment processor or gateway in terms of how long you can issue refunds, such as 14 days from the date of purchase.
In addition to a full refund, merchants can also issue a partial refund. For instance, maybe a customer ordered five items, loves three, and wants to return the other two. This is where a partial refund would be useful as it allows merchants to refund money up to the full amount of the original purchase.
Required: To issue a refund, you’ll need the original charge transaction ID from the processor.
Last on our list of payment types is the credit. Credits are useful if your customer is outside the time limit specified by the processor/gateway for a refund, or if there’s another reason a refund cannot be issued – like if their original card is no longer available. This process works just like a charge/sale, except that the funds are transferred from the merchant to the customer’s payment method.
Required: Merchants need the card number, CVV, and the customer’s information to issue a credit.
Why Payment Types Matter in Payment Processing
Cash transactions will always be so much simpler than processing credit and debit cards, but the benefits of an airtight payment process makes your business sales infinitely scalable, automated, measurable, and far more relevant in the world of online purchasing.
Understanding the various transaction types can help you make sense of services and fees offered by payment processors and gateways so you can spend more time offering unique value to your clients and customers – and build a bigger brand market share.
As always, Clear Function is here if you ever need a hand figuring it all out. Schedule a discovery call with us and let’s dig in.