If you have an online store, there are times when for some reason, a transaction for a customer is declined. This article tries to explain the process, and why many banks will hold the funds, making them unavailable to a client, even when a transaction is denied.

Much of this information is from Authorize.net and from a very helpful online store merchant ArtisticGiftBaskets.com who have done a great job explaining what happens and have given me permission to repost it here.

First a few definitions from Wikipedia:

Address Verification System (AVS) is “The Address Verification System (AVS) is a system used to verify the identity of the person claiming to own the credit card. The system will check the billing address of the credit card provided by the user with the address on file at the credit card company. The other security features for the credit card include the CVV2 number.”

Authorization Hold is “Authorization hold (also card authorization, preauthorization, or preauth) is the practice within the banking industry of authorizing electronic transactions done with a debit card or credit card and holding this balance as unavailable either until the merchant clears the transaction (also called settlement), or the hold “falls off.” In the case of debit cards, authorization holds can fall off the account (thus rendering the balance available again) anywhere from 1-5 days after the transaction date depending on the bank’s policy; in the case of credit cards, holds may last as long as 30 days, depending on the issuing bank.”

Now, with these two definitions in mind, let’s look at what happens when you make an online purchase (again, info courtesy of Artistic Gift Baskets):

The financial industry requires fund verification/fund reservation BEFORE address verification (AVS) occurs. It works like this:

1. You enter your credit card information into the payment page and submit for payment.
2. Your bank or credit card company is electronically contacted to verify if funds are available.
3. If funds are available, the bank or credit card company authorizes the amount, reserves that amount, and attaches an “authorization code” to the amount.
4. AFTER the funds are verified, your name, address, and billing info is then sent electronicaly to a separate Address Verification System (AVS) for validation.
5. If you entered any incorrect billing information, the AVS system rejects the verification and the card is declined.

The Result: Multiple attempts means multiple authorizations from your bank, appearing as multiple charges. These are not acutally charges, but temporarily holds that automatically expire based on your bank’s policies. ArtisticGiftBaskets.com , nor any other merchant, has absolutely NO CONTROL over the fund verification/AVS process or this specific problem.

The Solution: eCommerce is a still a new frontier and many of the problems / legal issues still need to be ironed out. We feel that federal legislation should be in motion to require financial institutions to reverse the current AVS/Fund Authorization process so that funds are not held prior to AVS.

So the bottom line, is that each time your are shopping online and your credit card is declined – there may be a hold put on your bank for the amount of the purchase. And if you try, and try, and try again and are unsuccessful – there will be three holds placed on your card. Again, these holds are placed by the cardholder’s bank, not the business owner, not the business owner’s merchant account, not the business owner’s gateway account. There is nothing the business owner can do to remove these holds.

Why doesn’t the bank put the hold AFTER the AVS is approved? We have no idea, this seems logical to me, but this is what banks do. And there are many store owners with really angry customers who can do nothing but apologize and ask the customers to vent their anger towards their banks. In this sense, the authorizations holds are a little like overdraft charges – they are really not the fault of the merchants – but a policy of the banks.

If you found this article helpful, please take a moment to share it with your friends, it will be much appreciated. Thanks! Jill