Here at Prezzee when an order is flagged as In Review, we "pre-authorise" the order payment on your credit card. This pre-authorisation may or may not appear on your bank statement (depending on your bank). We do not actually "capture" the funds until we have approved your order.
What is a credit card Pre-Authorisation?
A credit card Pre-Authorisation, as the name suggests, is a Pre-Authorisation for a specific amount of funds from a credit card holder. As a merchant we process the transaction on behalf of our customers. An initial credit card Pre-Authorisation is sent to check if the customer’s credit card is valid and that he or she has sufficient funds to complete the online transaction. Assuming the customer has sufficient funds the total amount of the online transaction is then held by the bank, and deducted from the customer’s credit limit.
It is important to note that even though the funds are held and deducted from the customer’s credit limit that the funds are not automatically transferred to the merchant’s settlement account. So if the customer has been deducted the online transaction amount and they are not able to access the funds then how does the merchant retrieve the amount owed?
What is a credit card Capture?
The credit card Capture is the missing piece of the puzzle that allows a merchant to have the funds that are owed to him transferred from the customer’s account to the merchant’s account. As you can see the online transaction amount does not reach the merchant’s settlement account until the funds are captured. What is interesting is that a merchant specifies the total amount to capture from the customer’s account.
This means that if a credit card Pre-Authorisation was issued for $10 from the customer’s account that the merchant could issue multiple credit card Capture requests until the $10 amount is reached. For example, the merchant may issue 5 x $2 Capture requests in order to retrieve the total online transaction amount owed.
How long does a credit card Pre-Authorisation last?
This is a very good question and it would not hurt for everybody to read this section. A credit card Pre-Authorisation has a specific time frame in which the merchant is able to issue a credit card Capture to retrieve their funds from the customer’s account. This time frame unfortunately is not set in stone and differs depending on the card scheme (VISA, MasterCard, American Express, JCB, Diners etc.) Generally speaking a credit card Pre-Authorisation will become void after 10 days or so.
If a credit card Pre-Authorisation has not been Captured by the merchant by the specific time frame specified by the particular card scheme the credit card Pre-Authorisation becomes void. The funds are then no longer held from the customer’s account and are put back into the customer’s account.
Using the example above, if a credit card Pre-Authorisation was issued for $10 and the merchant had not Captured these funds from the customer’s account in the specific time frame then the $10 would be credited back to the customer’s account and the $10 would be made available to the customer to spend again.
Credit card Pre-Authorisation and Capture
Plain and simple every online credit card transaction that takes place consists of a credit card Pre-Authorisation and credit card Capture. In most cases a credit card Capture is automatically sent on behalf of the merchant by the merchant’s acquiring Bank and this is why merchant’s are not required to manually run this step by themselves.
Who needs credit card Pre-Authorisation and Capture?
There are specific business models that will require the ability to have control over when they issue a credit card Pre-Authorisation and credit card Capture. A simple example of this would be a computer repair company that sent out employees to fix computer problems. Assuming they have a service cost of $50 this is how the process would look:
The Customer books computer repair specialist for $50
The Computer repair company issues a credit card Pre-Authorisation for $50 to the customer’s credit card
The credit card Pre-Authorisation is successful and therefore the Computer repair company knows that the Customer has the funds
A computer repair specialist is sent to the Customer’s house on the booking date which happens to be three days later
The computer repair specialists fixes the customer’s issue and notifies head office that the job has been completed
The computer repair company issues a credit card Capture for $50 from the customer’s credit card
The $50 is then transferred from the customer’s account to the computer repair company’s settlement account
This is a simple scenario in which the merchant can benefit from having control over when they issue a credit card Pre-Authorisation and credit card Capture.