When a purchase is made with a credit card, it is usually a very straightforward process for the store charging the card and for the customer making the purchase. This entire process is known as credit card processing. The transaction is billed through the merchant account to the customer’s credit card, the card issuer pays the store, and the customer goes home with their purchase.
But when the transaction is more complex, things can become a little more difficult to manage for both the merchant and the issuing bank. For example, if a customer wishes to purchase an ongoing subscription or a membership in an organization that charges monthly dues, merchants are often required to test whether the account they will be charging the fees to is legitimate.
Enter the “ghost authorization.”
A ghost authorization is when a merchant asks a bank to authorize a small amount against a customer’s credit card or debit card through their merchant account prior to authorizing their actual purchase. This is almost always done in order to test the validity of a customer’s account before opening an account where a long series of charges will be made.
The problem with a ghost authorization in credit card processing is that it nearly always fails to correspond with a purchase or legitimate transaction. It still shows up on the cardholder’s statement, however. When the statement is reviewed, there is a charge for $1.00 followed by a charge for say $20.00 (if that is the purchase price). The customer is then left to wonder “what is that one dollar charge for?” When they call to inquire, they are told it was to test if their account was valid, which only leads to further questions and further expense for the merchant and bank.
There are numerous alternatives which payment networks have advanced in recent years to reduce confusion for card holders.
One promising option is the advent of the $0.00 “account verification” or “address verification (AVS)” option, which does not appear on a customer’s statement and still gives merchants the ability to test the validity of a credit card before they authorize the larger purchase and the associated larger transaction.
The key problem with policies like “ghost authorizations” is they leave the customer out of the conversation. They aren’t told their card is being charged an extra transaction, so they are left to figure it out on their own, and that makes things more expensive for everyone.