Authorization Vs. Capture: Here’s What Merchants Need to Know

From a consumer’s perspective, card payments are quick and simple transactions that only take seconds to complete. However, there are many processes that take place behind the scenes after a purchase is initiated. Understanding these ins and outs of a payment’s lifecycle is extremely important for merchants to deliver impeccable service and retain customers.

In this guide, we will take a closer look at two card processing steps that are commonly confused: authorization and capture. Read on to find out what these terms mean and which roles they play in the payment procedure.

Authorization and Capture Explained

The definitions of authorization and capture are best explained in the context of the card payment processing flow.

Card processing can be divided into three major steps:

1. Authorization
2. Settlement
3. Funding

That’s where the first term on which this guide is focusing comes in. Let’s take a look a its definition:

Transaction Authorization

Here’s how it goes:

1. The cardholder places an order and presents a card for payment at the merchant site, app, or POS terminal.
2. The software then sends a request to the processor or acquirer, asking for the transaction to be authorized.
3. The acquirer receives the request and forwards it to the issuer through the card network for approval.
4. The issuing bank checks whether the card is valid and ensures that there are sufficient funds available to cover the purchase.
5. Once the checking is complete, the issuer will return a decision to the acquirer. This could either be an approval with an authorization code that allows the transaction to be finalized, or a decline with an error code.

Now that it’s clear what authorization is, you might be wondering at which point the capture step occurs.

Payment Capture

Even though the issuing bank confirms the availability of a sufficient amount of funds or credit to complete a purchase during the authorization step, money doesn’t move anywhere at that point. Instead, it is withdrawn on the capturing stage.

The payment capture timeline can vary, yet it is typically concluded within 5-10 days, as it is the period after which most card authorizations expire.

Authorization and Capture Examples

Here are a couple of common examples illustrating situations when there may be an extended gap between authorization and capture:

• Pre-order. If an online merchant doesn’t have the goods available to ship when the order is placed but is expected to receive them soon, the transaction will initiate a pre-authorization process. Once the products are ready to ship, a capture request will be issued, and the payment card will be charged.
• Hotel check-in. When a client checks in, hotels typically use an authorization-only request to verify the payment card. The authorization amount is usually larger than the final total, as it includes a damage deposit. This sum is kept on hold until the traveler checks out, which means that the pre-authorization and capture may take place several days apart, depending on the length of the stay.

In such cases, it is essential to ensure that the consumer is aware of the pending charge. Explaining how it works to the clients helps to minimize the number of inquiries related to the reserved sum.

Bottom Line: Why Are the Authorization and Capture Steps Necessary?

Both payment authorization and capture are in place to protect merchants and businesses from financial liability and potential losses by making the transactions more secure.

While these two procedures are often thought to be the same due to the fact that they go hand-in-hand in facilitating card processing, it’s essential to differentiate them, as they play equally critical yet distinct roles.