An Overview of Credit Card Processing Transaction Types

Last Updated on July 18, 2023 by Labib Ahmad

Credit card processing refers to many different types of credit card transactions besides just your common purchase, where a consumer uses their credit card to pay for a purchase, and the business owner receives the funds from the transaction.

All the types of credit card transactions we discuss in this blog are common in everyday purchases. For example, the gas station might perform a capture on your credit card when you fill up your car. A cashier performs a return to your account for the shirt you decided to bring back, and the hotel room you’ve booked will likely perform a pre-authorization or a "hold" on your credit card to secure a damage deposit. Each of these situations would require the merchant or business to run a different type of credit card transaction process using your credit card.

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What are the different credit card transaction types?

Below we will discuss six instances of credit card transactions you might see on your statement or online billing. We will discuss why businesses use these different transaction types or why a payment processor might post this to your merchant account.

What is a credit or debit card purchase?

A credit card purchase (sometimes called a sale) is the most common and straightforward credit card transaction type. Wanting to receive payment for a purchase from their customer's account, a merchant will process a credit card sale.

Here are the steps:

• The credit card information (gathered by card-present or card-not-present means) and the sale amount are sent to the credit card processor.
• The processor then sends all the transaction information to the card network.
• The card network asks the customer's issuing bank to approve the transaction for the requested amount.
• If approved, the processor returns an approval code to the merchant.

This is achieved in real-time, meaning that within a few seconds, the full transaction information is processed and approved by the credit card processing network.

What is an example of a purchase transaction?

A purchase transaction is the most common credit card transaction. For example, a customer walks into a store and purchases a jacket. The funds leave the issuing bank and are deposited into the merchant's account.

What is a pre-authorization transaction?

A pre-authorization (sometimes called a pre-auth or just authorization) is very similar to a purchase, but it does not complete the sale and funds are not yet captured. Just like a purchase, the transaction is processed in real time, and an approval code is provided to the merchant for the desired amount. However, the funds are not withdrawn from the cardholder's account but instead are put "on hold" or "reserved" for 7 to 10 days. When the merchant is ready to "capture" the pre-approved funds, the merchant will submit a capture request to complete the sale. This transaction type is often used for hotels, car rentals, and gas stations, where the merchant needs to ensure that a certain amount is available on the card without charging the final amount until the service is complete or the charge is to be incurred. If a pre-authorization is not captured within 7 days, the funds are unfrozen and released back to the cardholder.

What is an example of a pre-authorization transaction?

The most common pre-authorization credit card transaction you might have encountered is at a gas station. When you tap or insert your card, the gas station will confirm a pre-authorization on your card for the amount you selected, for example, $100. This tells the gas station you have the requested amount in your account. However, no amount of money is pulled from your account in a pre-authorization. That is where a capture transaction comes in.

What is a credit card capture?

Also known as a force, a capture is the second step after a credit card pre-authorization. For a capture to be successful, the merchant uses the original approval code generated from the pre-authorization to tell the card network to charge the customer's credit card. Captures can be completed up to 30 days after the original pre-authorization, but funds are only frozen for the first 7 days. This means that while a capture transaction could be performed on the 20th day, there is no guarantee that the cardholder will still have the funds available on their credit card.

Captures can be up to the full pre-authorization amount or a lesser amount, but not for more than the original pre-authorization.

What is an example of a credit card capture?

Taking the same gas station scenario as an example, in this case, the captured amount can range from any amount up to the pre-authorized amount of $100. For instance, suppose you only refuelled your car for $80. In that case, the capture request will pull only $80 from your account, even though you had been pre-authorized for $100.

What is a void transaction?

A void is used to cancel a previously authorized transaction. For example, if the incorrect amount was entered for a credit card purchase, the transaction can be voided and then processed again for the correct amount. A void transaction is also made in real-time to the credit card issuer or network, telling the customer's issuing bank to cancel the transaction and approval code. The customer will not be charged for the original transaction if it is voided. Voiding the transaction prevents interchange fees from being charged, but if it is processed as a refund, you will not get the interchange fees back for the transaction.

A void can only be performed if the batch has not yet been settled. If the batch has already been settled, a void can no longer be performed, and a refund transaction would need to be performed instead.

What is an example of a void transaction?

Void transactions can occur in various scenarios. For instance, if a merchant accidentally charges you twice for a single transaction. Another scenario is when a customer changes their mind immediately after purchasing an item and wishes to return it right away. Instead of processing a traditional refund, this 'refund' can be handled as a void transaction if the batch settlement process has not yet occurred— saving you paying processing fees for both the initial transaction and the refund.

What is a refund transaction?

Unlike a void, a refund can be performed after a batch has been settled. A refund is essentially a "negative" purchase, very similar to a stand-alone purchase transaction, but with a negative amount instead of a positive. It is always recommended to void the transaction if possible, instead of performing a refund because a voided transaction will not cause the customer to be charged for the original sale. If a refund is processed, the customer will see both the original and refunded amounts.

The refund amount will be debited from the merchant's bank account (or the most recent batch total) and returned to the customer. Even though refunds are processed in real time, the customer's issuing bank can take up to 10 business days to display it on the customer's credit card statement.

What is an example of a refund?

Refund transactions are fairly common. For example, suppose a customer purchases a faulty electronic device and decides to return it to the store. In that case, the merchant initiates a refund transaction, reimbursing the customer for the original purchase amount.

What is card verification?

Verification is essentially a $0 transaction. This is typically processed in a card-not-present scenario, where the merchant wants to verify the credit card but does not actually process an amount at that time. Often, this transaction method is used to "tokenize" the credit card for later use. When you do a verification, you are checking the validity of the credit card number, expiration date, and card security. However, since no amount is sent, what is not being verified is the cardholder's available balance.

What is an example of a credit verification?

If you've ever added your credit and debit cards to services like Apple Wallet or Google Wallet, a verification transaction is triggered to ensure the accuracy of the card information and to validate the user's identity. This process acts as an extra layer of security, confirming that the user is indeed the authorized cardholder.

Understanding credit card transactions

By understanding these different credit card transaction types, you are in a good place to start accepting credit card payments. Knowing each different transaction type will help you select the correct card transaction to process for different scenarios when accepting a customer's credit card.

FAQs

1. What is a batch settlement?

Several transactions, usually within a 24-hour time frame, are aggregated (batched) together. A batch settlement takes place usually end-of-day when the merchant decides to close up shop. Once the batch is closed and submitted, the merchant's bank reviews all the funds for the batch total, taking into account all transactions in that batch, whether they are purchases, void transactions, refunds, etc. Once settled, the funds are transferred to the merchant's bank account, while the customer's credit card statement reflects an "approved" or "pending" transaction status.

2. What is the difference between a void transaction and a refund transaction?

A void transaction involves cancelling an authorized transaction on the same day before settling all your transactions. By voiding a transaction, you effectively prevent interchange fees from being processed, benefiting both the customer and the merchant. On the other hand, a refund is giving money back to the customer after you have settled the transactions for the day. It's important to note that a refund transaction does incur interchange fees. To summarize, a void transaction cancels a transaction before it is settled, ensuring the customer is not charged for the original purchase, while a refund transaction is used to reimburse the customer after a batch has been settled, returning funds in a separate transaction from the original completed transaction.

3. Are there any fees associated with different transaction types, such as interchange fees?

• Purchase: Yes. This transaction type is the most frequent and is subject to interchange fees.
• Pre-authorization: No. A pre-authorization checks the availability of funds in your account without incurring any interchange fees until an actual charge is made.
• Capture: Yes. Once the merchant sends a capture request and a transaction takes place, interchange fees are charged.
• Void: No. A void transaction prevents interchange fees by cancelling a pre-authorized transaction before sending a capture request.
• Refund: Yes. Interchange fees incur because a refund is essentially a purchase transaction type in reverse.