In payment processing, the floor limit refers to the maximum transaction amount below which a merchant does not require authorization from the card issuer for a card transaction. It is also known as the floor limit amount or floor limit threshold. The floor limit helps streamline and expedite payment processing for smaller transactions, reducing the reliance on real-time authorization for every purchase.
Here’s how the floor limit works:
- Authorization Process: When a customer makes a card payment, the merchant’s point-of-sale (POS) system communicates with the card issuer to request authorization for the transaction. The issuer verifies the card’s validity, checks for available funds, and assesses the risk associated with the transaction.
- Determining the Floor Limit: The card issuer and the merchant agreement determine the floor limit amount based on factors such as the merchant’s industry, transaction history, and risk assessment. The floor limit is usually set as a predefined monetary value, and transactions below this threshold do not require real-time authorization.
- Offline Processing: Transactions below the floor limit can be processed offline by the merchant. In such cases, the merchant assumes the risk associated with the transaction and does not receive immediate confirmation of funds availability or approval from the card issuer. The merchant assumes that the transaction will be approved based on historical patterns and the floor limit agreement.
- Settlement: The merchant collects the customer’s payment information, including the card details, and completes the transaction. The transaction is stored in the merchant’s POS system and later batched for settlement with the payment processor. The merchant assumes the liability for any chargebacks or disputes that may arise from the transaction.
It’s important to note that the floor limit may vary depending on several factors, including the type of card (debit, credit), the merchant’s agreement with the card issuer, and the level of risk associated with the transaction. Merchants need to adhere to the floor limit guidelines set by the card issuers and payment networks to maintain compliance and manage risk effectively.