Using payment cards for purchases is convenient, but it opens up a number of avenues for fraud. These include spending funds a person doesn’t have; moving or spending money meant for a transaction on something else; or disputing a charge once it has already been approved.
A tool merchants can use to protect themselves from these types of fraud is a card purchase authorization system. This allows them to check if a payment card is valid and has enough funds before a transaction goes through. In this article, we’ll explain more about how it works and why it helps combat fraud.
What is Card Purchase Authorization?
Card purchase authorization is a process that checks if a payment card being used for a purchase is valid and active, and has enough credit or money to cover the purchase. It also allows for placing holds on customers’ funds so transactions can easily be changed or canceled if something goes wrong.
How Card Purchase Authorization Works
Purchase authorization usually applies to credit cards, but it can also apply to debit cards or even gift cards – any type of card that can be used to make a payment. It checks the card’s legitimacy, operational status, and amount of credit or money it can access. The process goes like this:
- A customer uses their payment card – or payment card details, if shopping online – to make a purchase from a merchant.
- The merchant sends a request to their bank for a transaction authorization.
- The merchant’s bank contacts the customer’s bank to verify that the payment card is both legitimate and available for use, and also has enough funds to cover the purchase.
- The customer’s bank puts an authorization hold on the money being spent on the transaction.
- The customer’s bank tells the merchant’s bank if the transaction was approved or declined.
If the transaction is approved, the merchant’s bank will provide the merchant – and sometimes the customer – with an authorization code. Once this code is used, the funds will soon transfer out of the customer’s account and into the merchant’s account.
In the past, this process took significant time, sometimes involving manual review. With modern digital solutions and real-time payment services, this process can happen virtually instantly. This makes it even more important to conduct to protect yourself against card payment fraud.
What is Capturing?
“Capturing” is the act of a bank freezing an amount of money or credit in a shopper’s account when they are attempting to spend it on a transaction. There are two reasons for this. The first is to check that the account won’t have a negative balance after the transaction is complete. The second is to ensure the shopper doesn’t try to spend the same money on a different transaction.
What is Settlement?
“Settlement” is when a payment card transaction clears, and money is moved from a shopper’s account to a merchant’s account.
What is a Card Purchase Authorization Hold?
A card purchase authorization hold is when a bank freezes an amount of money or credit in a shopper’s account that they are attempting to spend on a transaction. This is to ensure that the account won’t have a negative balance after the transaction and that the shopper doesn’t spend the money on anything else in the meantime.
The hold is released after the transaction clears, allowing money to move from the shopper’s account to the merchant’s. In cases where something goes wrong during the transaction, a hold can last up to 31 days. If no progress is made in resolving the issue before that time, the transaction is canceled, and the hold is released.
Why Card Payment Authorization is Important
Credit card purchase authorization is important because it provides a tool for merchants to protect their sales from chargebacks or other types of fraud. Here are some situations where a merchant might lose a sale that payment authorization helps to avoid:
- Incorrect Card Information: A payment card and its details used for a transaction don’t match the information on file with the customer’s bank.
- Insufficient Funds / Double-Spending: The customer doesn’t have enough money or credit on their payment card to cover the cost of the transaction, either because it wasn’t there in the first place or because they moved or spent it in the meantime.
- Card Payment Fraud: The customer is fraudulently using someone else’s payment card or its details, and the legitimate cardholder files a chargeback over the purchase.
- Lack of Inventory: The merchant accepts a transaction without realizing the requested item is out of stock, and the customer files a chargeback over the purchase.
- Chargeback Fraud: The customer makes a purchase, and then either accidentally or intentionally claims not to recognize the transaction. They then file a chargeback dispute via their bank or credit card company.
In all of these cases, being able to put a hold on a customer’s funds before approving the transaction protects the merchant. If there’s a problem with the transaction, the merchant can simply cancel it and release the hold on the customer’s credit or money.
In contrast, if the transaction goes through before funds are captured, the merchant risks losing out on getting paid. The customer may dispute the charge, move or spend the allocated funds after initiating the transaction, or never have had the necessary funds to begin with.
What is a Credit Card Payment Authorization Form?
A credit card authorization form is a document that, when filled out and signed by a customer, gives a merchant permission to charge their credit card. That way, if the customer illegitimately disputes a transaction, the merchant has evidence on file to help them fight the chargeback.
Most credit card authorization forms will require:
- The type of credit card
- The name that appears on the credit card
- The credit card’s number
- The credit card’s expiration date
- The cardholder’s postal code (or, sometimes, their full billing address)
- The merchant’s name (and, in some cases, additional business information)
- A statement authorizing the merchant to charge the customer’s credit card on file
- The cardholder’s name and signature
- The date the authorization took effect
In addition, some credit card authorization forms will also ask for:
- The cardholder’s phone number
- The cardholder’s email address
- The cardholder’s business contact information
- Details about the products or services purchased
- The total cost of the purchase
- A statement that the form authorizes recurring payments (if applicable)
- Merchant-specific customer ID, invoice, or purchase order numbers
Credit card authorization forms are useful protection tools against chargebacks for merchants who sell products or services that:
- Are high-value, such as vehicles or computer equipment
- Involve recurring payments (such as subscriptions), especially if a card is not present
- Require a deposit as insurance for a future purchase, or in case of an incident
How to Fight Fraud with Card Purchase Authorization
Card purchase authorization helps to prevent fraud in three primary ways.
1. It serves as an eligibility check on a payment card
Card purchase authorization helps to check if a payment card is genuine, authorized for use, and able to cover the balance of a transaction before the transaction is approved. This avoids simple but common fraud schemes such as double-spending, payment card fraud, chargeback fraud, and friendly fraud.
2. It protects the merchant from losing items or money by capturing funds ahead of time
By putting a hold on a customer’s funds allocated for a transaction before the transaction goes through, card purchase authorization gives a merchant a bit of insurance against losing items or money to fraud. If an issue arises with a transaction, the merchant can simply cancel it without authorizing it and then release the hold on the customer’s funds.
This avoids some of the risk that a customer will file an illegitimate chargeback, move or spend the allotted funds after the transaction has already started, or not have enough funds to cover the transaction from the get-go. Otherwise, the merchant may have to deal with the cost and hassle of trying to recoup items or money if they encounter a problem with capturing the customer’s funds after a transaction is approved.
3. It helps detect patterns that may point to fraudulent customers
Every failed card purchase authorization can serve as a data point for the merchant to study. In doing so, they may discover patterns that indicate specific customers are repeatedly and intentionally trying to commit fraud. The merchant can then take steps to cease business relationships with these individuals.
Go Beyond Card Purchase Authorization with Unit21’s Tools
While card purchase authorization can help prevent low-level fraud attempts merchants face, it’s hardly a foolproof solution. Besides using advanced payment card security technologies, a dedicated fraud detection system can go a long way toward stopping dishonest customers from taking advantage of your business.
Contact us at Unit21 today to try a demo.