Pre-Authorisation/Capture vs Purchase: What is the Difference?

Introduction

Credit card payment processing can be a complex process, with different methods and workflows used depending on the type of transaction. Two common payment flows in the card payment ecosystem are pre-authorisation/capture and purchase.

While both methods involve cardholders and merchants, their procedures and purposes differ significantly, which can affect both the consumer experience and merchant operations. In this article, we will explore the key differences between these two types of transactions, focusing on how the payment flows differ in terms of timing, risk management, and finality of the transaction.

Purchase: Immediate Authorisation and Capture

A purchase is the most straightforward payment flow. It occurs when a consumer buys a product or service and the merchant immediately requests payment from the consumer's bank or credit card issuer. Here's how the process works:

• Authorisation Request: When the customer submits their payment details, the merchant sends an authorisation request to the payment gateway, which forwards it to the card network (Visa, MasterCard) and the card-issuing bank. The bank checks the cardholder’s account for sufficient funds or available credit.

• Authorisation Approval/Decline: If the funds are available, the bank authorises the payment, placing a temporary hold on the amount to ensure that it can be paid when the merchant captures the funds. The bank will either approve or decline the payment based on available credit or funds.

• Capture: After the authorisation is approved, the merchant will immediately proceed to capture the authorised amount. The funds are transferred from the customer’s account to the merchant’s account, completing the purchase.

• Finality: The transaction is final once the capture is successful and the customer is charged for the product or service. There are no further steps needed from the merchant or the customer’s bank, except for any potential disputes or chargebacks.

This flow is commonly used for one-time purchases where the merchant knows the exact amount to be charged and the product or service is delivered immediately (e.g retail, online shopping).

Pre-Authorisation/Capture: Delayed Funds Hold

The pre-authorisation and capture method, often used in industries such as hospitality, travel, and car rentals differs from a standalone purchase in that the merchant doesn’t immediately capture the funds. Instead, they place a hold or authorisation on the customer’s card for a specified amount of time with the actual capture of funds occurring later. The steps in this flow are as follows:

• Pre-Authorisation Request: When the customer provides their card details, the merchant requests an authorisation from the customer’s bank, but the payment amount is not immediately deducted. Instead, a hold is placed on the card for the pre-authorised amount. This ensures that the funds are available but not yet deducted from the customer’s account.

• Authorisation Approval: Similar to the standalone purchase flow, the bank checks for available credit or funds and approves the authorisation. However, the key difference here is that this is only a temporary hold, not an immediate capture.

• Capture: The merchant captures the funds at a later stage, typically when the service is provided or the final amount is determined. For example, a hotel might authorise a hold on a guest’s credit card upon check-in, then capture the final amount (including any incidental charges) when the guest checks out.

• Finality: The authorisation hold will typically expire and reverse within a few days if the merchant does not capture the funds. If the merchant decides not to capture the amount, the hold will be released and no transaction takes place. If they do capture, the funds are transferred to the merchant’s account. The transaction may still be subject to a chargeback or dispute process, depending on the circumstances.

Key Differences Between Pre-Authorisation/Capture and Purchase

• Timing: The most notable difference is timing. In a purchase, the authorisation and capture occur almost simultaneously, with the merchant immediately processing the payment. In a pre-authorisation/capture scenario, the authorisation happens first and the capture may occur days or even weeks later.

• Risk Management: Pre-authorisation is often used by merchants to mitigate risk. For example, hotels may want to ensure that the customer has enough funds to cover their stay, including potential damage or incidental charges before they hand over a room. This method provides an opportunity to adjust the final charge (for instance, adding charges for room service or minibar use) before the funds are captured.

• Flexibility: Pre-authorisation allows more flexibility in adjusting the final amount based on the final service or product provided. Standalone purchases, however, are typically for fixed amounts with little room for change once the transaction is authorised.

• Customer Experience: Customers may not always be aware of pre-authorisation holds, as the funds are not immediately deducted from their account. While this is a common practice in industries like hotels and car rentals, it may lead to confusion or concern for customers who see the hold but don’t understand why the transaction has not been finalised and why their funds are being held. In contrast, standalone purchases are more transparent because customers know when they’re being charged and for how much.

Conclusion

While both pre-authorisation/capture and purchase transactions involve authorisation from the customer’s bank or card issuer, they are designed for different purposes. Standalone purchases are quick and final, making them ideal for straightforward transactions, while pre-authorisation and capture allow merchants to hold funds temporarily, giving them more flexibility in adjusting the final charge. Understanding these differences is crucial for both merchants and consumers to navigate the complexities of credit card transactions and ensure a smooth payment experience.