Therefore, you’re a merchant and expected to understand the intricacies of online transactions. You can save on paying a fee you need to pay while processing the refund for the transaction or transaction if you know them.
Applying these transaction concepts correctly will result in overall customer satisfaction. We’ll mention the diverse types of online transactions here.
The various terminologies used to refer to the types of online transactions discussed are distinct in each processor. Therefore, they are distinct from direct merchant accounts associated with third parties.
Different Types of Online Transactions are:
- Authorization transaction
- Settle transaction
- Sale transaction
- Void transaction
- Refund transaction
- Original credit transaction (OCT)
1. Authorization transaction
Variously known as card authorization, pre-authorization, pre-auth, or authorization Hold Auth, Authorization is one type of Online Transaction that constitutes a request to keep the funds before the transaction materializes.
Authorization is a sort of transaction that brings an outstanding transaction in a cardholder’s account to be settled on a designated date later. When the card-issuing bank (the issuer) consents to the authorization, permission to keep the requested fund on hold is permitted.
The funds are allocated and can be kept for one to nine days. If settled immediately, it can be held for up to 30 days. The principal reason to keep an authorization on hold is to ensure enough funds are available to execute the transaction. All the information provided is accurate, and the issuer consents to charge.
2. Settle transaction
Also called a capture, a settle transaction closes the authorization process and leads to funding settlement. The settlement can materialize immediately or be processed by batch once daily. Depending on the product/service quality and the customer base quality, you can decide where to make the settlement immediately or by bay.
The option to process the daily charges all in one go allows the merchant to cancel/void any recent transaction. But if you settle immediately, the settlement cycle is cut short, and the transaction cannot be rescinded. Therefore, any completed transaction has to be refunded if need be.
3. Sale transaction
A sale transaction comprises two transactions, namely authorization and settlement. Determining between the two ways of doing things mainly depends on the nature of your business. If you deal in Forex brokerage involving large deposits, changing from sale processing to auth/settle will escalate the processing cost by adding the transaction fee. But it will give your team that looks after risk and the processor extra time to review the legitimacy of transactions, consult one another, and rule out handling refunds in a rush afterward when the transaction could be discarded in the first instance.
4. Void transaction
A vendor or merchant cancels a void transaction before settlement through the consumer’s credit or debit card account. The transaction apprises the processor’s gateway about your not willing to move on and settle the funds. Usually, the processor should inform the transacting bank to release funds held during the authorization. However, a few acquiring banks do not offer the processors this option. In such a case, the settlement transaction will not be sent, and funds will be released only after the hold expires.
If you work with the ‘sale method,’ you may still be able to void the transaction altogether. It depends on how your processor and the banks are related. If they’re working live, enforcing the approved authorization is impossible. A settled transaction immediately follows it. Banks sometimes want to examine the batch of all authorizations sent to them at a particular hour (afternoon) on the designated date. The transaction can still be voided in such a case as the settlement is not included in the broadcast.
If the transaction is disputed, it can be voided even though it has not been settled. In such a case, the transaction is pending and has not been cleared, which implies that the sale cannot be executed.
5. Refund transaction
This sort of online transaction is also called a credit return or credit. It involves funds being returned to the cardholder from the merchant account once the transaction is completed and settled.
According to the return policy, a refund transaction is executed according to the case and your refund. It’s probable to refund the amount partly but not more than the original amount charged, and it should be returned in the same case as the initial charge was redeemed. In case a transaction is refunded, the cardholder cannot charge it again.
You can only execute refund transactions in a settled or settling status. You can issue an invoice if you wish to perform a particular transaction with an authorized, paid, or pending settled status.
6. Original credit transaction (OCT)
Formerly known as CFT, OCT is a type of Online Transaction meant for designated merchants who are looking for the option to issue a credit toward a card that did not necessarily result in the transaction or is entitled to more than the amount charged, as many as 50,000 units per day. A classic example is the Visa card.
MasterCard and Visa use an OCT mechanism. This allows firms to make customers pay to cardholder beneficiaries.
When the card company MasterCard or Visa debits the merchant account and credits the cardholders, the transaction is said to be completed.
The principal industries permitted to execute OCT-type online transactions are forex merchants and gaming industry entities. The banks involved in acquisition look down on refunds, as any return of funds is absorbed, whether it is a winning or a withdrawal. The benefit for customers is that you cannot rule out bank charges and landing fees to the beneficiary.
However, Merchants would like to issue refunds to protect this transaction from being charged back, as the OCT does not provide such protection. Usually, the acquirers will allow the highest refund at a 5% ratio issued on these accounts.
After leaving Wells Fargo Bank in 2014, Daniel began a career as a finance consultant, advising companies and individuals on economic policy, labor relations, and financial management.
At Nimblefreelancer.com, Daniel writes about personal finance topics, value estimation, budgeting strategies, retirement planning, and portfolio diversification.
Read more on Daniel Smith's biography page.
Contact Daniel: daniel@nimblefreelancer.com