Authorization, Capture & Settlement

Monday, February 27, 2012

Last week we talked about Interchange- the base for all credit card processing.  Today, we are going to discuss the process & fees related to Authorizing, Capturing & Settling credit card transactions.  We will use our Bicycle Shop again today to give you a real life example of how this process works!!  Let's start with definitions!

AUTHORIZATION:  When a credit card is processed, the first step in the approval process is AUTHORIZING the amount requested by the business owner.  No money is actually moved during this part of the process but an imaginary hold is placed on the credit card, protecting the amount of money the consumer spent.  The merchant has less than 30 days to complete the process- if a merchant only Authorizes a transaction and does not complete the process within the time frame, they will not be paid.

bicycle_traffic When the Bicycle Shop Owner wants to accept payment, they swipe the card (or key enter the card)- an approval means that the Bicycle owner has 'Authorized' the requested funds.  The amount the customer purchased is now being held for the Bicycle Shop.  He/She has 30 days to complete the process so we better find out what happens next.....

CAPTURE:   When the business owner closes out their terminal at the end of the day, the CAPTURE process begins.  The money is now on the way to the business owner's account. 

bicycle_traffic Our Bicycle Shop Owner batches out their terminal at the end of the day and the CAPTURE process begins.  A successful batch receipt signifies that the money is on the way and ready for the final step in the payment process.....

SETTLEMENT:  After a credit card system is batched out, the SETTLEMENT process is underway!  Funds are being debited from a cardholder's credit card balance and they are transferred to the business owner's checking account- this settlement process typically takes 2 business days.

bicycle_traffic On Monday, our Bicycle Shop Owner sold a bike for $700.  He/She swiped the customer's credit card and received an Authorization (or approval) code.  Later that same day, the Bicycle Shop Owner batched their terminal and Captured the $700.  On Wednesday, the $700 was deposited to their checking account and the Settlement process was completed!


When the bicycle shop owner gets their credit card processing statement, they can expect to see the Interchange Costs we discussed last week as well as a per item fee to cover the cost of their credit card processing system to dial out and go thru the Authorization, Capture & Settlement process. 

Next week we will look at the most common additional fees related to the credit card processing industry.

Cheri Perry 2/27/2012

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