What Is a Floor Limit?
A floor limit—also known as a "credit floor"—is the maximum charge that can be made to a credit card without obtaining prior authorization. As such, a floor limit is designed to protect against the risk of credit card theft.
- A floor limit is the maximum charge that can be made to a credit card without prior authorization.
- Historically, floor limits were set by stores and required making a physical imprint of a credit card.
- Today, transaction authorizations are carried out nearly instantaneously through electronic payments network. Floor limits are therefore less prominent than they were in the past.
How Floor Limits Work
Historically, merchants would verify customer transactions by taking physical imprints of a credit card. However, because this process was time-consuming, it was generally done only for transactions of a certain size. The exact size varied depending on the store, and became known as the store's "floor limit." Any purchase for less than the floor limit could be completed without physically verifying the card, while larger purchases required verification.
Today, floor limits have faded in importance because of the ease of electronic payment authorizations. Because this authorization no longer requires physical imprints, but is instead carried out through the merchant's point of sale (POS) terminal, most transactions today require verification even for relatively small amounts.
However, there are some instances in which floor limits continue to be used. When a POS terminal is unable to access the payment gateway—for example, due to an electricity blackout or internet connectivity issues—merchants will often allow transactions to proceed without authorization provided they are below a certain size. Similarly, some stores still use physical card imprints and other manual authorization methods as a back-up solution for when electronic systems fail. In these circumstances, floor limits are often used.
Real World Example of a Floor Limit
Emma owns a small convenience store that processes about $1,500 in daily transactions. When starting her store, she needed to develop policies that balanced her own need for fraud protection against her customers' desire for convenience.
One of her key tasks was to select an appropriate floor limit to use when electronic payments are unavailable. If she chooses a floor limit that is too high, she might expose herself to fraudulent payments. On the other hand, choosing a very low floor limit could risk frustrating her customers and increasing the time and labor required to complete sales. Observing that her average transaction size is below $20, she decided on a floor limit of $50.
Thankfully for Emma, the issue of floor limits rarely arose in the ordinary course of business. Except for the rare instances where her internet connection failed, her electronic payments system automatically conducted its own transaction authorizations, protecting both her and her customers from the risk of fraud.