The content of this article is provided for informational purposes only. You should always obtain independent business, tax, financial, and legal advice before making any business decision.
In July 2025, Mastercard will introduce a new fee structure targeting transactions with undefined authorization types. This mandate will add 25 basis points (bps) of the transaction amount, or a minimum of $0.04 USD per transaction to US volume, with Canada following suit in September. This can turn into a cost burden for merchants, necessitating a reevaluation of their current payment processing strategies.
An undefined authorization is a legacy Mastercard authorization type where the authorization indicator field is not included. This has traditionally been used where the transaction amount may be different from the final transaction amount. In 2018, Mastercard introduced Pre- and Final authorizations to transition from undefined to either Pre-Auth or Final Auth.
Pre-authorization is typically used when the final transaction amount may change. This method is preferred by merchants to avoid needing to create a second transaction to cover additional charges. Pre-auth is best used in scenarios where the final amount is not known (e.g., tips, additional items, or price changes)
Considerations:
Final authorization is used to verify that a card has enough funds to complete a transaction, where the amount to be captured is known at the time of the initial authorization.
Considerations:
Merchants should conduct a thorough review of their current authorization practices to identify transactions with undefined auth types. Understanding the transaction volume and amount of these transactions will help in estimating the potential impact of the new fees.
Consider shifting to final authorization where feasible, especially for transactions where the final amount is known at the time of purchase. This can help in avoiding the additional fees associated with undefined and pre-authorizations.
For transactions where the final amount is uncertain or may be adjusted, such as those involving tips or additional items, continue using pre-auth but be mindful of the additional costs. Ensure that the pre-auth amount is as accurate as possible to minimize the need for adjustments. In cases where the final amount may be larger than the original pre-authorized amount, merchants may consider an incremental authorization or over-capture. An incremental authorization is used to request additional funds on an already approved authorization; typically in hospitality, car rentals, and healthcare. An over-capture refers to capturing an amount greater than the one initially authorized, this is only allowed for specific merchant segments and transaction types.
Regularly monitor authorization amounts and adjust them as needed in cases where there are changes to the transaction to reflect the final transaction value accurately. This can help in reducing the frequency of voids and new authorizations, thereby minimizing additional costs.
Invest in payment processing technologies that can help in managing authorizations more effectively. Automated systems can help in ensuring that the correct authorization type is used and that adjustments are made promptly.
Ensure that your staff is well-informed about the new mandate and the importance of using the correct authorization type. Additionally, communicate with customers about any changes in transaction processing that may affect them.
Work closely with your payment processors to understand the full implications of the new mandate and to explore any available solutions or workarounds that can help in mitigating the impact of the additional fees.
Mastercard's new mandate on undefined authorization types presents a significant change for merchants. By understanding the implications and adopting best practices, merchants can navigate this new landscape effectively, minimizing additional costs and ensuring smooth transaction processing. Stay proactive, evaluate your current practices, and make the necessary adjustments to stay ahead of the curve.
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