It’s no secret that credit card processing can be quite complex to understand. It involves everything from the need to maintain compliance with PCI standards and keep updated hardware and software, to staying up-to-date with payment trends and basic knowledge of the ins and outs of the transaction lifecycle.
At Stax, we’re here to help merchants understand what they need to know about payment processing so you can get to business faster and focus on what matters most—your customers. One aspect of payment processing that creates confusion for many is the difference between authorization and capturing payments.
While all transactions fundamentally require both authorization and capture, merchants often choose between two processing modes: 1. Sale (or auth-and-capture): A single command that initiates both steps instantly. 2. Authorization-only: A two-step process where the merchant separates the fund hold (authorization) from the final settlement (capture).
TL;DR
This article explores the basics of authorization and capture—which are, at a glance:
- Authorization and capture is a two-step process for completing credit card payments. Authorization ensures the account has sufficient funds and is in good standing by holding funds as pending without charging the card. Capture is the process of transferring funds from the customer account to the merchant account, moving it from pending to complete.
- Many transactions transfer the charged amount from the customer’s account to the merchant account in one step. Authorize and capture payments work differently and can hold funds as pending before submitting the request to capture funds.
- Businesses that use authorization and capture to hold funds in excess of the amount charged, or have a longer time for transaction processing, should disclose the terms clearly to their customers to avoid confusion and poor customer service experiences.
- Authorization is the most critical step because, when approved, it provides the merchant with the guarantee that the funds are available and, in most cases, triggers the liability shift that protects the merchant from certain types of fraud.
Authorize and capture defined
Once a transaction is initiated, merchants choose between two modes: the auth-and-capture mode (the instant, single-step sale) and the authorization-only mode (the two-step process where capture is delayed).
Authorization occurs when the merchant initiates a charge to a customer’s card at checkout, either online or in person. During this process, the payment processor checks with the cardholder’s bank to ensure the account has sufficient funds and is in good standing. If the account meets the criteria, the transaction amount is held pending. Pre-authorizing a card verifies the payment method is valid and helps prevent declines and insufficient funds (NSF) chargebacks, which saves the merchant money. However, merchants must still use other tools to prevent disputes related to fraud or service issues.
Capture is the process by which the transaction is completed and funds are withdrawn from the customer account, processed, and transferred to the merchant account—moving the transaction status from pending to complete.
In sum, authorization and capture are two distinct parts of a transaction that first verify funds and then charge the customer for the transaction amount. Both are needed to process a transaction, and authorization is always the first step.
Authorize and capture is essential for delayed delivery/service, but it’s also a best practice for card-not-present (CNP) transactions. When coupled with successful AVS/CVV checks, it creates the necessary audit trail for the merchant to defend against fraud-related chargebacks.
However, there are some circumstances where the time between authorization and capture is extended.
Steps needed in the authorization and capture process
Many transactions appear to transfer the charged amount from the customer account to the merchant accounts in one step (though there is still a lot happening behind the scenes). Authorize and capture payments work a little differently since the authorization step holds the funds as pending before the capture request is made to finalize the transaction. There are essentially three steps for authorization and capture transactions.
Step 1: Create the payment
The first step is to initiate a transaction using the payment application programming interface (API). If your business has the functionality to process authorization and capture transactions, this will be a seamless function at the point of sale. With Stax, we make it easy by allowing you to simply check a box that enables pre-authorization and go back later to capture and settle the transactions.
Step 2: Request for authorization
Once the transaction is initiated, the merchant’s payment gateway will contact the issuing bank of the customer’s payment method to hold the funds. The amount of time a transaction can spend in the authorization stage will also depend on your payment processor as well, so be sure to check with your processor for additional details. The duration of the authorization hold is governed by the card network and the merchant’s MCC (merchant classification code). While some MCCs require capture within 7 days, others (like hotels) allow up to 30 days or more. Stax ensures you maximize the hold time allowed by the card networks for your business type, simplifying the need for re-authorization.
Step 3: Capture funds
Once the card is authorized and the final amount is confirmed, the capture request is issued to transfer funds. This leads to the final stage: Settlement, where the funds are transferred through the card network to the acquiring bank and ultimately deposited into the merchant’s business account.
Note: When processing a debit card, the authorization hold freezes actual cash funds in the customer’s checking account. Merchants should be extra mindful of releasing these holds promptly, as delayed releases can cause customer overdrafts and dissatisfaction.
Examples of authorization and capture in action
There are a few ways that authorize and capture work in action that can apply to different types of business. While many transactions authorize and capture in one fell swoop at checkout, especially with brick-and-mortar merchants, there are several transaction types where the capture process takes place days or weeks after the authorization.
One example of this is an ecommerce order where the merchant does not have the merchandise available to ship immediately but will in a short amount of time, such as a pre-order. In this case, the pre-authorization is initiated at the time of the transaction. Once the goods are available to ship, the capture request is issued, and the credit card is charged.
Another example of authorize and capture in action that many people have experienced is checking into a hotel. Upon check-in, an authorization-only request is used to verify the customer’s credit card, and usually, the amount of the authorization is greater than the final total because it includes charges for incidentals or damages. That amount is held until checkout when the customer settles any charges—meaning that pre-auth and capture take place several days apart depending on the length of the stay.
In any case of authorization and capture, it is crucial to clearly inform the customer when the authorization amount is greater than the final sale amount (e.g., holding $100 for incidentals). This transparency is vital to mitigate confusion and service issues. With authorization-only, it is important to make sure the customer is aware of the pending authorization hold and the expected date for the final capture/settlement to occur. Clearly communicating with your customers on what to expect will mitigate service issues and inquiries before they arise and is always a best practice.
Final thoughts
Accepting debit and credit card payments is just one of many ways Stax can support your business’s payment processing needs, which includes the ability to pre-authorize transactions.
FAQs about authorize and capture
Q: What is the difference between authorization and capturing in payment processing?
Authorization and capture are two key aspects of payment processing. Authorization is the process of verifying the availability of funds and the good standing of a customer’s account. This is done by holding the transaction amount as pending in the account without actually charging the card. Capture, on the other hand, is the step where the transaction is finalized and funds are withdrawn from the customer’s account and transferred to the merchant’s account. The transaction status changes from pending to complete during this process.
Q: Can authorization and capture take place at different times?
Yes, there can be a time difference between authorization and capture. For instance, in an ecommerce order scenario where the product is not immediately available for shipment or in a hotel where check-in is completed in advance, the authorization can be initiated, and the actual capture can take place later when the goods are ready to ship or after hotel checkout.
Q: What are the benefits of using authorization and capture in payment processing?
One significant benefit of using the authorization and capture method in payment processing is that it provides an additional layer of protection to all parties involved. Merchants can verify the validity of payment methods without charging them, helping to prevent expensive chargebacks. Additionally, customers are protected, as their cards are not charged until the transaction is ready to be completed.
Q: What is the process of authorization and capture?
The authorization and capture process involves three key steps: initiation of the transaction using a payment application programming interface (API), request for authorization from the customer’s bank that holds the funds, and finally, the capture of funds wherein the transaction moves from pending to complete as the funds are transferred from the customer’s bank to the merchant’s account.
Q: Is it necessary to inform customers about the authorization and capture process?
Yes, it’s crucial to communicate transparently with customers about the authorization and capture mechanism to avoid confusion and potential customer service issues. This is especially important if a transaction involves holding funds in excess of the actual amount charged, as seen in hotel check-in scenarios.
Q: Can the time period between authorization and capture be extended?
While the exact timeframe can vary depending on your payment processor, the maximum amount of time funds can be held is typically 30 days. After this period, the authorization request expires, and a new one is needed.
Q: What is the role of the payment gateway in the authorize and capture process?
In the authorize and capture process, the payment gateway plays a crucial role. After the transaction is initiated, the payment gateway contacts the customer’s issuing bank to hold the pending funds. Later, a capture request is issued to transfer the funds from the customer’s bank to the merchant’s account.
Q: Is it possible to have authorization and capture in a one-step payment process?
Many transactions appear to conduct the authorization and capture in one step, but in reality, the same processes still happen behind the scenes. The difference with using authorize and capture explicitly is that the authorization step can hold the funds as pending for a certain period before the capture request is made to finalize the transaction.
