What is a standard floor limit?
The term “standard floor limit” refers to the size of the transaction above which merchants are required to obtain authorization when processing a transaction. credit card transaction. For example, a trader with a standard floor limit of $100 should allow any trade over $100.
Due to the rise of high-speed electronics payment processing systemsstandard floor limits are less important than they were in the past, as merchants can use these electronic systems to communicate directly with banks for approval.
Key points to remember
- A standard floor limit is the limit allowed by a merchant to approve credit card transactions.
- Any credit card sales above a standard limit require approval from the credit card company.
- Standard floor limits are measures put in place to reduce risk by preventing credit card fraud.
- Today, transaction authorizations occur automatically using electronic payment systems, making standard floor limits less important than they used to be.
- Most online transactions have a zero floor limit, which means that all transactions require authorization, regardless of size.
Understanding a standard floor limit
The basic principle of standard floor limits is to limit the risk of fraud or non-payment associated with each transaction. In theory, a trader with no standard floor limit could find himself vulnerable to large losses if he makes large credit sales to his customers. To help mitigate this risk, merchants negotiate standard floor limits with their credit card processors, whereby all transactions at or above the designated level will be automatically authorized at the point of sale.
Standard floor limits may vary depending on the type of credit card used by the customer. For example, a merchant may have the same floor limit for Visa (V) and MasterCard (MY) transactions, another floor limit for Discover (DFS) and a third floor limit for American Express (AXP) operations. For this reason, floor limits can sometimes be a determining factor as to which types of credit cards a merchant will accept.
Standard floor limit process
When a transaction exceeds the merchant’s standard floor limit, the terminal holds the transaction while the merchant contacts the credit card company for authorization to ensure the customer has sufficient credit to complete the transaction. purchase.
For example, if a customer attempts to purchase $1,000 worth of merchandise in a single transaction from a merchant with a standard floor limit of $500, the credit card company will need to contact the merchant to approve the charge. If the customer’s fee is approved, the sale is closed. In case of refusal, the merchant can cancel the sale.
Historically, merchants and customers had to manually record their transactions using hand-held credit card printers. These heavy devices, colloquially called brass knuckles, would use carbon paper to make a physical copy of the information engraved on the customer’s credit card. The merchant, in turn, should keep track of these carbon copies and use them to painstakingly reconcile their transaction records. Because of this labor-intensive process, it often took days or even weeks to determine if a fraudulent transaction had taken place.
Electronic payment systems and standard limits
Technological improvements have since drastically improved the approval process. Today, merchants use electronics point of sale (POS) terminals to process credit card transactions, automatically generating digital records and printed receipts. These POS terminals can even communicate directly with the customer’s bank and credit card issuer to determine if the customer has sufficient funds to complete the transaction. In light of this, the standard floor limits are less important than before, as credit card transactions can now be authorized electronically within seconds of making a purchase.
As terminals with advanced authentication technologies such as microchips, PINand magnetic tapes have been rolled out more widely in the marketplace, merchants transacting in person tend to take significantly less time to authenticate credit card transactions. In contrast, transactions that are not face-to-face, such as telephone sales or internet transactions, are often subject to zero floor limit. This means that all of these transactions require authorization before being approved, regardless of their size. Approval in this case, however, can be obtained quickly.