Transaction Type Explained

Payments Learning Resources

Transaction Type Explained

In modern society, there are many financial exchanges that take place and each one is associated with a specific transaction type.

What is a transaction type?  

multiple payment options illustrated with cartoon hands

 In this article, we will explain the different types of credit card transactions that merchants process through the payment gateway they use.  The processing of a credit card payment is described in a specific transaction type that is usually influenced by the purchase’s nature. Merchants who accept credit card payments process different types of transaction, apart from the most common one, called ‘purchase’ or ‘sale’. This includes the customer making the purchase and the business receiving the funds instantly. A credit card transaction takes other forms such as ‘pre-authorization’, ‘capture’,‘void’, ‘refund’, and ‘verify’.  

What payment methods do merchants accept?  

The payments industry has evolved due to technological advancements and the different needs that customers have developed over the years. For instance, cash used to be the most popular way of payment but during the last few decades credit cards and e-wallets have gained popularity amongst consumers. Prior to analyzing the credit card transaction types, let’s have a look at the payment methods that are available through a merchant’s store. The three most common payment methods accepted at a merchant’s store include:  

  • Cash  
  • eWallets  
  • Credit Cards  

Cash payments  

A visual representation of cash payment

As one of the oldest payment methods, cash is still one of the most preferred payment mediums by consumers in certain markets, as it is widely accepted and does not require a mobile phone or a bank account. Cash payments are also available as an online payment   method and are ideal for merchants who wish to offer their services and products to customers living in countries with a low credit card penetration rate. In order to accept cash for online payments, a merchant should partner with a payment service provider who offers cash payment solutions for localized payments.  

For instance, Powercash21 supports your business’s localization strategy by offering a wide range of cash payment options such as Carulla, Boleto Bancario, SingPost, and many more.  

Advantages of cash payments  

  • Increased convenience for your customers 
  • No special equipment needed to accept cash payments
  • Payments are received instantly, without the need to wait for the funds to be transferred to your account  

Disadvantages of cash payments  

  • Potential security concerns from the customer’s end – if a customer loses their wallet all their money is lost or they might not feel comfortable to convert their cash for a prepaid voucher for online shopping purposes. 
  • Risk of fraud: cash payments do not require any personal details of the customer in order to be processed, therefore the risk of fraudulent activity is relatively high.  


an e-wallet as demonstrated with a mobile phone wrapped inside a wallet  

An eWallet is a mobile application which stores a customer’s credit cards and can be used for online and offline transactions.  

Advantages of eWallets

  • Convenience – your customers do not need to carry all their credit cards but can access them through their eWallet.
  • Data protection – the customer’s credit card data is encrypted, adding an extra security layer to digital wallet payments.  

Disadvantages of eWallets  

  • Geographic restrictions – certain eWallets operate only in specific regions of the world and cannot be used worldwide. It’s important that merchants provide a variety of eWallets as a payment method on their checkout pages to cover the payments needs of customers around the world.  

Credit Cards  

a visual representation of credit card payments

Credit cards are considered the most widely used online payment method globally. Online merchants can easily expand their business activities almost everywhere in the world by accepting credit card payments from networks like Visa and Mastercard.  

Advantages of credit card payments  

  • Accepting credit cards increases your profit as it attracts the majority of online shoppers who prefer to pay by credit card.
  • Improved customer satisfaction by avoiding issues of dissatisfaction from a marketplace that expects this to be an available payment method.  

Disadvantages of credit card payments  

  • Risk of fraud and chargebacks. By accepting credit card payments, businesses run the risk of fraudulent payments and chargeback disputes.
  • Credit card refunds are not instantaneous.  

The major credit card types of transaction 

 Sale/Payment – after a credit card’s information has been captured at an online store’s payment page and is submitted to the payment processor, the transaction is sent to the issuing bank to be approved for the requested amount. Once the payment has been authorized by the bank, the merchant receives an approval code. This occurs in real-time, indicating that the transaction is approved and completed, and it will be sent for settlement. When the payment has been processed successfully, the merchant will receive the transaction funds on their merchant account.  

Authorization Only/ Pre-authorization – in this case, the merchant blocks the necessary amount for the purchase on the customer’s credit card in order to be settled at some point in the future. The holding period usually lasts 3 to 7 days and the blocked amount is not available for use by the customer for any other purchase. Businesses with a certain Merchant Category Code (MCC) may have a long hold period up to 30 days. Authorization transactions that are not captured within the hold period will expire and merchants should authorize and capture a new transaction to get the funds. Hotels and car rental businesses use pre-authorization when             making future reservations.  

Capture –a capture transaction denotes that the merchant captures an already authorized transaction that has not been settled yet and submits it for clearing and settlement. This case applies when online merchants initiate an ‘authorization transaction’ and reserve the transaction funds by the cardholder’s issuing bank prior to the product’s shipment or delivery. Once the product has been shipped or delivered, the transaction will be captured and submitted for settlement.

Void – a void transaction is one that is canceled before it is settled. Merchants are allowed to void transactions that have been authorized or approved by the card’s issuing bank but are not yet settled (open batch).  

Refund – this is the case when a merchant refunds a settled transaction and submits the refund for processing. A refund is allowed for ‘sale’ and ‘capture’ transactions and represent either the full or a part of the transaction amount. 

Verify – a verification transaction type is used to verify the credit card’s number, expiration date and security code at a card-not-present transaction. The merchant might charge the cardholder a small fee, e.g. €0 or €1. This type of transaction is done to ‘tokenize’ a credit card for future use, mostly for subscription-based purchases.  Powercash21 as a payments provider can guide online merchants through the different credit card transaction types and alternative payment methods. Online merchants can obtain           merchant processing accounts fast and integrate their online store to our proprietary PCI Level 1 payment gateway for secure credit card transaction processing through one simple integration.

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