What it means
When a customer pays by card, the merchant can either ask the bank to approve the payment or, for small amounts, proceed without asking. The floor limit is the amount under which the second approach is allowed.
Above it, the terminal must contact the card issuer to confirm that the card is valid and that funds or credit are available. The idea dates from the days when terminals were slow and phone lines were costly.
Authorising every small purchase was impractical, so card networks and acquiring banks (the banks that process payments for merchants) set limits to speed up everyday sales. The limit varied by merchant type, with higher-risk businesses given lower limits.
For a merchant, the floor limit defines who carries the risk. If a payment is under the limit and later proves fraudulent, the merchant often has to absorb the loss, because no authorisation was obtained.
If the payment was properly authorised, responsibility generally falls elsewhere, depending on the card network's rules. Today, most card payments are authorised online in real time, and many floor limits are set to zero, meaning every transaction is checked.
Floor limits still matter in offline situations, such as terminals on aircraft, at events or in places with weak connections. Contactless payments also use limits, but those are usually separate cardholder limits on how much can be paid without a PIN.
Acquirers set and review limits as part of the merchant agreement. A merchant with a good record might receive a higher limit, while one with many chargebacks (disputed payments returned to the customer) could see it reduced.
Always check the contract so you know your exposure. The rule of thumb is to set the limit at a level where the cost of occasional fraud is lower than the cost of delays and lost sales.
For a coffee kiosk that is a small number, and for a jeweller it is likely to be zero.
In practice
Real-world examples.
Example
A food truck at a festival has no mobile signal. Its terminal accepts card payments below the floor limit offline and sends them for settlement later, so the owner keeps selling through the lunch rush while accepting a small risk of declined payments.
Example
A jewellery shop agrees a floor limit of zero with its acquirer. Every sale is authorised online, and the owner has no exposure from unapproved payments, even though a slow connection occasionally makes a customer wait a few extra seconds.
Example
A regional airline uses offline terminals for in-flight sales. Its finance team sets a low floor limit, reviews the declined settlements after each flight to measure the loss rate, and reports the trend to the commercial director every quarter.
Formula
Calculation
Maximum unauthorised exposure per day = Floor limit x Number of transactions processed without authorisation
Suppose a market stall has a floor limit of $50 and its terminal goes offline for a day. Customers make 40 purchases, each just under the limit, so the largest possible exposure is 40 x $50 = $2,000. If 3% of those payments turn out to be fraudulent, the expected loss is 0.03 x $2,000 = $60, compared with the sales that would have been lost by refusing every offline card.Case study
Seen in the real world.
Lakeside Leisure Park is an illustrative, fictional attraction with many small kiosks across a large site. A patchy network meant that terminals regularly dropped offline, and the operator allowed card sales under a floor limit to continue.
After a weekend of poor connections, the finance team found that 2% of offline payments were later declined, costing about $1,800. They responded by lowering the floor limit at the busiest kiosks and fitting a backup connection.
The illustrative result was a drop in declined payments and a smoother queue, as fewer customers were turned away at the counter. The team now reviews the limit each season, weighing the lost sales from checking more payments against the loss from accepting them blind.
Watch out
Common mistakes.
- Assuming a payment under the floor limit is guaranteed, when the merchant may bear the loss if it later proves fraudulent or declined.
- Confusing the floor limit with the contactless limit, which is a separate rule about when a PIN is required.
- Never reviewing the limit, even though changes in fraud patterns or in the connection can make an old limit unsuitable.
Questions
People also ask.
Who sets the floor limit?
The acquiring bank normally sets it in the merchant agreement, within the rules of the card networks, and it may differ for each type of merchant or terminal.
Is a floor limit still used today?
Many merchants use a zero limit with online authorisation, but limits still apply in offline or poor-signal situations.
Can a merchant raise its own limit?
Not usually, because the limit is part of the contract and a change needs the acquirer's agreement, which the bank will give only if it is happy with the merchant's fraud and chargeback record.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related