What it means
Years ago, card payments were processed on paper slips, and merchants were allowed to accept small payments without calling the bank. The amount below which no approval was needed was the floor limit.
Larger payments needed an authorisation, which was confirmation from the card issuer that the card was valid and funds or credit were available. A zero floor limit means there is no such threshold.
Every payment is sent electronically to the issuer for a decision, so the merchant knows at the time of sale whether the payment will be honoured. Today this is the normal approach for most electronic card payments, and it is especially common for online and contactless transactions.
For a business, the benefit is protection against fraud and unpaid charges. If a merchant accepts a payment without authorisation and the card turns out to be stolen or over its limit, the payment can be reversed later through a chargeback (a forced refund to the cardholder).
With a zero floor limit, the risk of that happening is much lower because the issuer has checked each transaction. The nuance is that authorisation is not the same as settlement.
An approval confirms the funds are available at that moment, but the money is only transferred later when the merchant submits the transaction for settlement. A merchant can also still face a chargeback for disputes, such as a customer claiming that goods never arrived.
Zero floor limits can slow things down in places with weak connectivity, because every sale needs a live connection. Some offline systems therefore keep a small floor limit for low-value sales while the network is down.
Businesses choose the setting by weighing the risk against the convenience, and many now treat zero as the default. Zero floor limits are also written into the rules of card schemes and acquiring contracts, so the setting is rarely a free choice for a merchant.
A business that wants to change it should ask its payment provider what is permitted and what liability it keeps for offline sales.
In practice
Real-world examples.
Example
An online electronics shop authorises every order before dispatch. A $1,800 laptop order is declined by the issuer because the card has been reported stolen, so the shop never ships the goods. Under an old floor limit the order might have been accepted without a check.
Example
A coffee chain accepts contactless payments on a zero floor limit. Even a $4 purchase is sent to the issuer, and an approved response comes back in a second or two. The chain accepts the small delay in exchange for lower fraud losses.
Example
A market stall owner takes card payments on a mobile reader with patchy signal. His provider allows a low offline limit of $25 for sales when the network is down, and requires full authorisation otherwise. He understands that offline sales above the limit may be declined later. He keeps a notebook of offline sales so he can follow up any that are later refused.
Case study
Seen in the real world.
Saltmarsh Outfitters is an illustrative, fictional chain of clothing shops that used to allow staff to accept card payments under $100 without authorisation during busy periods. Over a year, it discovers that 140 such payments were later reversed, totalling $9,800 in losses.
The finance manager moves all shops to a zero floor limit, so every payment is authorised in real time. Chargebacks from lost and stolen cards fall sharply, and the checkout delay averages only a second or two. The chain also trains staff to check for approval messages before handing over goods.
The illustrative lesson is that the old convenience of unchecked small payments was costing more than it saved. A zero floor limit trades a few seconds of speed for much greater certainty. The finance manager also reviews what the change cost. Each authorisation request carries a tiny processing fee, but across 400,000 annual card sales the extra fees came to well under the $9,800 previously lost. She presents the comparison to the board, along with a note that the shops now keep a written procedure for days when the network connection is down.
Watch out
Common mistakes.
- Believing an authorisation guarantees the merchant will be paid forever, when a later chargeback can still reverse the payment.
- Confusing authorisation with settlement, when authorisation checks the card and settlement actually moves the money.
- Allowing a floor limit on all sales for convenience, when it exposes the business to unpaid and fraudulent payments.
Questions
People also ask.
What is a floor limit?
It is the amount below which a merchant could accept a card payment without asking the issuer for approval.
Does a zero floor limit apply to online payments?
Yes, online and contactless payments are usually authorised in real time, so the practical floor limit is zero.
Can a zero floor limit cause declined payments?
Yes, if the issuer refuses the transaction, or if the connection fails and there is no offline allowance.
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