Authorization & Settlement: The Impact on Chargebacks

After a transaction has been approved, it can advance to settlement. 

Settlement timelines can vary. In some situations, transaction settlement will happen immediately after authorization. Other times, it will be delayed by hours, days, or weeks. 

Here are some examples of different settlement strategies and the merchants who might use them:

• A grocery store settles a transaction immediately after it’s authorized since the shopper will be walking out the door with the purchased items. 
• A restaurant authorizes a transaction as the customer dines but waits until after the tip is added to settle it.  
• An ecommerce merchant authorizes a transaction during checkout, but it isn’t settled until the next day when merchandise availability is confirmed and items are shipped.
• A hotel authorizes a transaction when the customer makes a reservation and settles it a week later after the guest checks out.

Many businesses that delay settlement incorporate authorization holds into the payment processing workflow.

Billing descriptors describe payment card activity and help cardholders identify transactions on their bank statements.

Descriptors play a significant role in chargeback management. Among other things, descriptors help customers understand what they purchased. If they don’t recognize a transaction, they might suspect fraud.

It’s important to create unique, easily-identifiable descriptors, but that can be a difficult task. Billing descriptors are dynamic — they can change based on certain transaction variables such as:

• The card brand (Mastercard^®, Visa^®, etc.)
• The issuer (cardholder’s issuing bank)
• The type of card used (debit, credit, prepaid, etc.)
• The item purchased
• The stage of the transaction lifecycle (pending, settled, refunded, etc.)

It’s this last variable — the stage in the transaction lifestyle — that ties back to the authorization process.

Your billing descriptor may say one thing while the transaction is pending, but appear completely different after it has settled.

When you submit an authorization request, you’ll receive an authorization response code. There are dozens of different response possibilities, all of which can advise you on how to proceed.

Some of the codes advise that you ‘pick up card’. This means the cardholder has reported the card as lost or stolen, flagged the credit card number, and the transaction you are trying to process is likely fraud.

Declining these transactions reduces the risk of processing unauthorized transactions and can avoid the resulting chargebacks.

Just like many other parts of the payment processing workflow, authorization is thoughtfully regulated by the card brands. There are several rules governing how and when you should request authorization. 

If you do not comply with expectations, you could be penalized. One of the most common courses of action is to initiate a chargeback when an authorization error occurs.  

Here are some examples of authorization-related chargebacks:

• Discover Reason Code AT– You were supposed to request authorization but didn’t. 
• Mastercard Reason Code 4808 – You authorized the transaction, but didn’t settle it within the time limit. 
• American Express Reason Code A01 – The settled transaction amount was more than the authorized transaction amount. 

Because the authorization process includes multiple tasks completed at different stages of the transaction lifecycle, there are multiple opportunities to make mistakes. And different mistakes warrant different penalties.

While some errors are addressed with chargebacks, others are fined.

For example, Visa charges a ‘misuse of authorization system’ fee for every approved transaction that isn’t reversed or settled through its credit card networks.

Unless you use an authorization hold or a ‘pre-authorization’, you have to settle the transaction within seven days. If you don’t, the transaction may be eligible for a late presentment chargeback.

However, authorization-related chargebacks are only valid if you made an authorization error and the card is no longer ‘open to buy’. 

If the account has been closed or there are no longer sufficient funds to cover the charge, the issuer can initiate a chargeback for a transaction settled outside the timeframe.

But, if the account is still in good standing, the transaction could go through without a problem — even if it is settled late. A chargeback isn’t automatic. 

It’s important to note that issuer approval and cardholder approval are two different things. 

An approved authorization simply tells you that the account is in good standing. It doesn’t confirm that the cardholder has given permission to process the transaction. 

Therefore, it’s possible for an issuer to approve a transaction during the authorization process and the cardholder dispute it as an unauthorized (or fraudulent) purchase. 

Sometimes, these chargebacks are legitimate; criminals might have committed fraud. But another possibility is that your customers are making false fraud claims. Click here to learn more about this ‘friendly’ fraud. 

As part of the authorization process, you can put a hold on your customer’s account until you are ready to settle the transaction. 

Not only does a hold help ensure you are paid for the purchase, it also helps prevent a chargeback by acting as a warning for the customer. 

Once alerted to the upcoming charge, the customer has a chance to review the pending transaction. If an error or fraudulent activity is discovered, the issue can easily be fixed before the transaction is finalized. 

The following are examples:

• Richard signs up for a monthly subscription. After looking at his credit card statement, he realizes he used the wrong card. He calls and switches to a different form of payment before the charge actually hits his account.  
• Emily doesn’t recognize a pending transaction on her statement and suspects fraud. She calls the number listed in the billing descriptor to clarify the purchase. 

With an authorization hold, you also buy yourself some time. You can likewise review the situation and address any issues before they become chargebacks.  

Here are some examples: 

• Two charges come through, both from Luke and both for the same baseball hat. A call to verify the purchases reveals there is a glitch in the checkout process. Luke didn’t receive an order confirmation message, so he tried again. Canceling the duplicate transaction solves the problem. 
• Lorelai ordered a pizza for delivery, but her topping of choice is sold out. After discussing the alternatives, Lorelai changes her order to a salad and the transaction amount is updated.