Credit Card Transaction Types Explained: The Kinds of Transactions You’ll Process as a Business Owner

Card processing is a part of every business’s day-to-day. Cash today accounts for only 19% of transactions. The preferred payment methods are credit and debit cards. To help merchants, issuing banks, and consumers understand the payment status, payments categorized based on their types. These transaction types tell the story of what’s going on with the payment.

Understanding transaction types is important for small businesses, large businesses, and everything in between. That story indicates what the card is being used for and what is being purchased.

The guide below will help you understand the different types of transactions and what they mean for your business.

TL;DR

  • Cash accounts for only 19% of transactions. The preferred payment methods are credit and debit cards.
  • Online, in-app, in-store, or over the phone, all transactions will fall into one of 9 transaction types.
  • Understanding transaction types lets you understand what the card is being used for and what is being purchased.
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9 Credit Card Transaction Types

Whether sales are made online, in-app, in-store, or over the phone, all transactions will fall into one of these transaction types.

Credit card pre-authorization (pre-auth)

This is the first step in a credit card transaction. The customer provides their credit card information to the merchant, who then contacts the card issuer for approval. The merchant may also have to provide their merchant category code (MCC) to the issuer. The issuer reviews the information and either approves or denies the transaction.

If the authorization transaction is approved, the issuer will provide an authorization code to the merchant. The merchant can then complete the sale. If the transaction is denied, the sale will not go through.

The pre-auth step is common across all business types. It could be used for card-present purchases at a gas station or card-not-present eCommerce transactions alike.

Pre-auth processes automatically through the point of sale (POS) when a transaction is processed. While the communication goes from the merchant to the card issuer, this is really just the systems talking. The merchant’s payment gateway connects to the bank’s software, and each side confirms whether or not the sale can be processed.

Credit card authorization

Payment authorization is the approval outcome post-pre-auth. The customer’s card is swiped, dipped, tapped, or entered online, and the card issuer has given the go-ahead for the purchase transaction. Once authorized, the authorization amount is put on hold. This hold is until the transaction is cleared through the merchant.

For example, if a customer buys a new pair of shoes from an eCommerce store, the authorization puts a hold on the funds until the shoes are shipped.

Credit card capture

After the original transaction is authorized, it still needs to be completed or “captured.” This is done by the merchant, who submits the transaction to their bank for processing. The bank will then send the funds to the merchant minus any fees.

Some businesses choose to capture transactions immediately after they are authorized. Others may wait until later in the day or week to capture all of their transactions at once. This is called batch processing.

While it is the role of merchants to submit the transaction for processing, this process is automatic, not manual. Your payment processing provider will have a solution that smooths this process.

Credit card purchase (sale)

This is the most common type of credit card transaction. And the one merchants will most like to see. The credit card purchase is the transaction type confirming that the sale has gone through and the funds have been withdrawn from the cardholder’s accounts.

The customer provides their credit card information to process a credit card purchase. The merchant submits that card data and transaction information to their bank for approval. Once approved, an authorization approval code is provided, and the sale is complete.

Credit card refund (return)

A refund transaction occurs when a customer returns merchandise they have purchased or cancels a service. The merchant initiates a refund by contacting their bank and requesting the funds be returned to the customer.

The bank will then send the funds back to the customer minus any interchange fees. Refunds can be processed for the full amount of the original purchase or for a partial amount.

Again, merchant’s don’t need to call the bank to complete this process manually. Mechanisms are in place through the payment processor to process cancellations and refunds in just a few clicks.

Credit card void

A void transaction is a type of transaction that is canceled before it is completed. This can happen if the customer changes their mind about a purchase or if the merchant decides not to complete a sale. Voids are typically processed very soon after the sale was originally initiated.

To void a transaction, the merchant’s account connects with their bank and requests that the transaction be canceled. The bank will then cancel the transaction, and no further action is required.

Voids can only be processed for transactions that have not yet been completed (i.e., they haven’t been captured by the merchant). If a transaction has been completed, it cannot be voided. In this case, the merchant would need to process a refund instead.

Credit card chargeback

A chargeback occurs when a customer disputes a charge on their credit card statement. The customer contacts their credit card issuer and requests that the charge be reversed.

The issuer then contacts the merchant and requests proof that the cardholder made the purchase. If the merchant cannot provide this proof, the charge will be reversed, and the customer will receive a refund.

If the merchant does have proof of purchase, they can choose to fight the chargeback. This process can be time-consuming and expensive. Many merchants choose to accept the chargeback and move on. However, it’s worth watching your chargebacks to see how you can minimize them.

Credit card verification

A credit card verification confirms that the customer’s credit card is valid. This is done by the merchant, who submits the credit card number to the bank for validation.

The bank will review the transaction information and either approve or deny the transaction. If the transaction is approved, the card network will provide an authorization code to the merchant. The merchant can then complete the sale. If the transaction is denied, the sale will not go through.

Credit card verifications are typically only for small amounts, such as $1 or $2. This is done to minimize the risk of fraud for the merchant. It’s also used when registering credit cards for subscriptions or recurring payments. To avoid issues come payment day, these verifications confirm that the security code is correct and there is money in the account. It can then be registered on file.

Credit card settlement

The final step in a credit card transaction is the settlement. This is when the merchant completes the sale, and the funds are transferred from the customer’s account to the merchant’s account.

The timing of settlements depends on the card issuer, acquirer, and payment processor. For example, American Express settles transactions within 24 hours. Mastercard and Visa settle within 48 hours.

The settlement process is automated. The payment amount is transferred from the customer’s account to the merchant’s account through the payment processor. The merchant doesn’t have to take any further action.

How long it takes for the funds to reach the merchant account depends on the transaction processing provider. Once payment processors receive the funds from the banks, it is usually only 24 hours before reaching the merchant’s bank account.

Processing the Correct Credit Card Payments

While you should be well-versed in the transaction types, you can also rest easy that the categorization is done through your processor and the various banking systems. Once set up with your credit card processor, these codes are automatically applied. Your systems know which transaction type applies to which transactions.

All you really need to consider is whether you’re getting the best merchant services. Are you getting the best rates? Does your provider simplify the payment process? Can you grow with different functionality and APIs as your business needs change?

For transparent membership pricing and a comprehensive suite of integrations, contact the team at Stax. We have solutions for all types of businesses processing all types of transactions. Stax helps you to move faster, think smarter, and increase profits.

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