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With online selling channels taking off globally, retail and online consumers have begun using credit cards for payments like never before. Authorizations secured on the customer’s cards have an expiration time (for eg. 3 days for debit cards, gift cards, 7 days for credit cards), depending on the rules specified by the banks. Recently VISA has introduced “Visa Authorization System Misuse Fee”, which introduces new fees for processing credit card transactions for transactions not conforming to VISA rules and processing guidelines.

A fee will be levied, in addition to the normal transaction fees, against merchants if authorization is not reversed and gets expired or if the auth is only partially used. Many retail companies’ revenue comes in from these types of transactions and therefore, managing the costs incurred because of these becomes increasingly important. Let us look at the two points below describing the problem in detail and then the solution for it.

1. If an authorization expires without a settlement transaction initiated against it, a misuse fee is charged by the payment processor to the retailer. Suppose, an auth is taken while the order is getting created and is set to expire within 7 days. If the fulfillment and settlement of the order do not happen within 7 days due to inventory unavailability or customer not turning up for pick up or failure of shipment confirmation etc, then auth will get expired and misuse fees will get charged to the retailer.

2. Failure to match the settlement amount with the authorization amount also results in the misuse fee being levied by the payment processor. Any type of cancellations or modifications on orders which results in the amount on order to increase or decrease may result in situations when the settlement amount does not match the authorized amount.

credit cards

To explain the current behavior, let us consider a scenario. While creating an order, an authorization equivalent to the total order amount is created. When invoices are created and settled, this authorization is used against the invoiced amount. So when order O1 is created an authorization, say A1, equal to the order total of $70.00 is created. When the order is scheduled and released and say two releases R1 (for L1), R2 (for L2) and R3 (for L3) are created and so correspondingly three shipments and three invoices I1 (10$), I2 (20$), and I3 (for 40$) are created. So, when invoice I1 is settled it uses only $10 out of the 70$ available against auth A1. So there is a misuse of auth A1.

To avoid levying such a fee, the IBM Sterling Order Management solution has introduced a new feature called “Charge Transaction Request and Auth reversal”. Authorization reversal is the process of removing the authorization hold on the customer’s card by invoking a reversal transaction to the payment processor. The reversals ensure that the authorizations don’t get marked as misused. “Misused Authorizations” are defined as authorizations that are not followed by matching clearing/settlement transactions and are subject to a fee.

The charge transaction request feature allows users to have a fine-grain control over when and how much authorization is created for an order.  A charge transaction request (CTR) represents a subset of the total order amount that will be invoiced.  Typically, CTRs are created on creation of releases, as they provide a fairly accurate picture of the eventual shipments and invoices. In the example above, once the potential releases are identified for the order (R1-10$, R2-20$, R3-40$), when the  Order Release(s) get generated, logic can be applied to delete the old charge transaction requests (CTR) and create new CTR’s equal to the number of releases and the corresponding release amount. When a collection request occurs, the authorization A1 is reversed since the authorization amount does not match the CTR’s present and new authorizations A2-10$, A3-20$, and A4-40$ are created. This reversal of authorization and creation of authorizations is handled effectively through simple product configurations and helps in reducing the misuse fee levied due to Authorization misuse.

This is a common case of authorization and settlement not matching and may happen quite often during order fulfillment or modification process. Because of the misuse fees introduced by VISA, many major retailers are beginning to turn to auth reversals so as to avoid any extra charges by banks on them. As this type of fee gains more popularity amongst credit card companies, we at Bridge Solutions expect that reversals will become a standard practice amongst anyone who takes even a modest number of credit card orders.  If you would like to learn more about reversals, the IBM Sterling Order Management Suite, or payment execution best practices in general, please contact us at [email protected].