Alternatives to the $1.00 Authorization

Many online merchants and merchants with recurring billing programs have long used $1.00 Authorizations to test account validity. When an issuing bank places an authorization on a cardholder’s credit card or debit card the merchant and the acquiring bank lose control of the transaction. An issuing bank can leave an authorization on a cardholder’s account for an extended period of time: sometimes up to 7 days and the merchant and acquiring bank have no say on when it comes off the cardholder’s account. Sometimes the authorization amount may be subtracted from the cardholder’s available balance and an online statement may show the held funds as an actual charge. In the case of a debit card can these authorization can be held against the available balance in the cardholder’s checking account. One dollar authorizations followed by the full amount of the sale can appear to a cardholder to be a double billing or extra charge and can generate disputes and chargebacks. If a merchant charges a low sign up fee and a higher monthly membership and authorizes the card for the membership amount and settles for the sign up fee amount it can appear to the cardholder as a double billing for twice the membership fee. With a debit card this can result in double the amount the cardholder expected being held against their available balance and their bank’s online statements can make it appear that the funds are already out of the account. These “ghost authorizations” can cause anxiety among cardholders and result in chargebacks, disputes, and cancellations.

Visa has responded to cardholder complaints and confusion over $1.00 ghost authorizations with two new mandates designed to discourage merchants from performing $1.00 authorizations to test account validity:

Effective July 1, 2009, Visa implemented an Account Verification Fee for each account verification ($0 authorization or AVS Only) request transaction. This Account Verification program provides an alternative to the $1.00 authorization: merchants will be able to do a Zero Dollar Value authorization request which can include Address Verification (AVS) and CVV verification. MasterCard has a similar verification process.

Effective October 1, 2009, Visa implemented a Misuse of the Authorization System Fee ($1 Authorization) which will be applied to any authorization transaction that is not followed by a matching clearing transaction (delay capture), or in the case of a cancelled or timed out transaction, any transaction not properly reversed (voided). These fees apply only to transactions processed by U.S.-based merchants and does not apply to partial or full authorization reversal requests.  These fees are billed by Visa directly to the merchant account provider/acquirer, who may pass it on to the merchant. These mandates apply only to U.S.-based merchants whose Merchant Account is provided by a financial institution that is a U.S. Visa member.

Differences between a $1.00 Authorization and $0.00 Account Verification.

$1.00 Authorization 

Merchants submit an authorization transaction for one dollar, never intending to settle this authorization. An approved authorization response shows the merchant that the cardholder’s account, address and CVV2 value are valid, and that it is generally OK to proceed with the transaction. The authorization only decreases the cardholders spending limit by $1, with this decrease eventually expires or “falls off” of the cardholders account within 7-30 days. These “ghost authorizations” can appear to cardholders on online statements as extra charges or double billings and cause anxiety among cardholders and result in chargebacks, disputes, and cancellations.

$0.00 Account Verification (AVS Only)

Also referred to as an “AVS-only” transaction. It is also used to test account validity. The difference is that with a $0.00 authorization, $1.00 ghost authorizations no longer appear in the cardholders billing statement, eliminating confusion.  Visa’s new Zero Dollar or Zero Dollar Floor Limit Account Verification program will includes Address Verification (AVS) and CVV verification. Visa would prefer to see merchants using the $0.00 Account Verification Program, for which they will charge a transaction fee, and discontinuing $1.00 Authorizations. Visa is encouraging merchants to change to this new practice through the second mandate:

Misuse of Authorization System Fee

Visa requires all authorization transactions to be followed by a clearing (delay capture or settlement) transaction or, in the case of a cancelled order, for the transaction to be fully reversed (voided). Visa is charging a fee for each authorization request transaction that is not followed by a delay capture transaction or which is – in the case of a cancelled order – not voided within 72 hours. This fee applies only to U.S.-based merchants and does not apply to partial or full authorization reversal request messages.The fee is billed by Visa directly to the merchant account provider/acquirer, who may pass it onto the merchant.

To avoid the fee, merchants must either perform a delay capture within 10 calendar days of the original authorization request or void the authorization within 72 hours of the original authorization request.