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A merchant authorization is when a card issuer records an authorization amount as unavailable to the cardholder until the merchant resolves the transaction or the card issuer releases the hold. The transaction typically settles within a few days for debit card purchases, and a clearance reversal can stop a merchant’s clearance. Problems can arise with the authorization of a merchant, such as double authorizations, which can result in a temporary reduction in available funds for the cardholder.
A merchant authorization is a practice commonly used by businesses that accept debit or credit card payments, such as shops, hotels, rental companies, and restaurants. When a merchant authorization is granted on a credit or debit card, the card issuer records the authorization amount as unavailable to the cardholder. It is not available until the merchant resolves the transaction or the card issuer releases the hold. The transaction typically settles within a few days for debit card purchases, although in some cases, credit card processing can take up to several weeks.
A merchant authorization involves both a funds clearance and a settlement into the merchant account. When a customer pays with a credit or debit card, authorization occurs. Basically, the merchant swipes the customer’s card through a card processing machine and the cardholder information is passed on to the card company. The company verifies that sufficient funds are available to cover the purchase and that the card can be used properly. Furthermore, the company holds the purchase amount as unavailable to the cardholder, although the funds are not yet transferred to the merchant’s account.
When the merchant reconciles his credit and debit card sales, the card company moves the payment to the merchant account. For example, suppose a customer with a credit card limit of $500 United States Dollars (USD) uses their credit card to purchase a sweater for $60 USD. When the merchant swipes the card, the customer’s card company holds $60 USD in the account. The customer then has $440 USD available on the card. When the trader closes his accounts at the end of the day, the $60 USD will be transferred to the merchant account.
Usually, a merchant’s clearance can be stopped using a procedure called a clearance reversal. Most card companies that support reversals require that they be done within a short period of time, usually within minutes of the merchant’s first authorization. Also, card companies usually cancel debit or credit card transactions at the cardholder’s request.
Problems can arise with the authorization of a merchant. For example, a merchant may inadvertently authorize a card twice, even though he ultimately reconciles the sale only once. For the cardholder, this may result in a temporary reduction in available funds. Also, when merchants wait a few days or weeks to settle sales, cardholders can miscalculate their available funds and end up overextending. Confusion can also arise when a merchant tries to reverse a transaction or hold it for an amount other than the settlement amount.
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