A Guide to Credit Card Transaction Types
A credit card might just be a piece of plastic (plus a fancy computer chip, nowadays), but it can be a pretty sophisticated payment method. Credit card transactions can be processed in all sorts of different ways, depending on the situation.
While basic purchase transactions are the most frequent use case for credit cards, anyone who processes credit card payments on a regular basis should take the time to learn about the various scenarios that call for nonstandard transaction types. How many different credit card transaction types are there, and what do merchants need to understand about them?
Credit cards seem pretty straightforward at first glance. You see something, you want to buy it, you present your card, and the card gets charged. The charge hits your account, the money gets transferred to the merchant. Simple.
Sometimes, though, you take the purchase home and change your mind about it, so you take it back to the store for a refund. How do the funds get taken back from the merchant and reapplied to your card? Well, that’s a different transaction type. And if you need to stop and gas up your car on the way back to the store, you run your card at the pump before you know how much the total fill-up cost will be, and that requires another different transaction type.
Cardholders don’t need to know much about the inner workings of card transaction types, but for the merchants on the other end of these transactions, it’s very important to understand why and how to use different card transaction types for different situations. Using the wrong transaction type can cause problems that can easily turn into chargebacks if they aren’t corrected right away.
What Are the Different Credit Card Transaction Types?
Let’s get right to the list, starting with the most common type:
Also referred to simply as a charge or sale, a purchase is the basic credit card transaction type that everyone is familiar with. When a cardholder wants to buy something, they give their card information to the merchant—either by scanning it at a terminal in card-present environments or by furnishing their payment credentials over the phone or internet—and the merchant transmits the card and sale information to the payment processor. The processor then communicates with the card network to finalize the transaction and will send an approval message back to the merchant to confirm it.
Despite their complexity and the number of parties involved, most credit card transactions are completed in a matter of seconds, regardless of their type. However, the settlement process that actually moves money from the issuing bank to the merchant account can take some time.
Every purchase transaction should begin with the authorization step, in which the issuing bank confirms that the card is valid and the account is in good standing before the charge goes through. However, sometimes you want to authorize an expected charge without completing it right away.
This is how self-service fuel pumps work. If customers were allowed to gas up first and then pay once the final purchase price was established, lots of them would just drive off without paying.
Instead, they’re required to run their credit card first, which unlocks the pump for use. Hotels and motels use a similar process, running a guest’s card at the start of their stay instead of when they check out.
Pre-authorization is a transaction type that puts a certain amount of funds “on hold” for the merchant until the final purchase price is established. At that point, the merchant can run a capture transaction (see below) to actually charge the cardholder’s account. These holds are temporary, and if the merchant doesn’t capture the charge within a short time frame—usually about seven days—the hold expires.
A capture transaction is used to complete a purchase that was initiated with a pre-authorization. You can capture an amount less than or equal to the hold amount, but you cannot exceed it. Captures can be processed up to thirty days after pre-authorization, but the hold does not last that long and there’s no guarantee the funds will be available after that point.
In order to establish the relationship between the two transactions, captures should always include the approval code generated by the pre-authorization.
Every cardholder’s favorite transaction type—a refund transaction—is when a credit is processed to return funds to the cardholder’s account. Refunds should be utilized when the original transaction has already settled and the funds are in the merchant account. If the charge has not yet been settled, it’s better to use a void transaction instead.
Sometimes transactions get processed in error, or the cardholder changes their mind right away, and the charge needs to be reversed. You can accomplish this with a refund, but refunds can take several days to settle and both the debit and the credit will show up on the cardholder’s billing statement. If the charge hasn’t been settled yet, a void transaction is a neat and clean way to make it go away. Another benefit of void transactions is that they cancel out the interchange fees you would otherwise be required to pay.
In certain situations, particularly in e-commerce, it can be useful to verify that a card is valid and tokenize its information for future use, but you don’t actually want any funds to change hands just yet. This is what verification transactions are for. It’s basically just a $0 charge that confirms that the card has a valid account number, expiration date, and security code. It cannot tell you how much funds are left available on the card, though.
How Are Chargebacks Affected by Different Transaction Types?
Chargebacks that result from processing the wrong transaction type are almost always categorized as merchant error chargebacks. When you get a valid chargeback as a result of your own mistake, there’s nothing you can do to fight it—your best move is to accept it, figure out why it happened, and adjust your business operations to ensure it doesn’t happen again in the future.
One of the more frequently-seen chargebacks related to transaction type is “credit processed as charge,” in which a transaction that’s supposed to be a refund actually hits the cardholder with a duplicate charge. Authorization-related chargebacks are also common.
The chargebacks that result from improper transaction processing are costly—and entirely avoidable. Everyone on your staff who processes transactions should be informed about how to process charges, holds, refunds, and voids. Even if major errors are avoided, knowing things like when to process a void instead of a refund can help you avoid fees and provide faster, more satisfactory customer service.