Credit Authorization

« Back to Glossary IndexCredit authorization is a term that refers to the process that occurs when a consumer uses a debit card or credit card at business to pay for good and services. We call this "the path of credit". When the card is run (physically swiped, keyed-in, etc.) the merchant's credit card terminal […]

Credit authorization is a term that refers to the process that occurs when a consumer uses a debit card or credit card at business to pay for good and services. We call this "the path of credit".

When the card is run (physically swiped, keyed-in, etc.) the merchant's credit card terminal communicates information about the transaction from the merchant (aka "the business") to the business's merchant account provider.

The merchant account provider verifies that there is enough money on the card to be used for the transaction, and communicates back to the merchant's terminal whether or not the transaction should be accepted. If the consumer's transaction is accepted he/she receives the purchased goods and goes about their day.

However, this is not the end of the credit authorization process.

Behind every merchant account provider is an institution called a member bank. The role of a member bank is basically to "police" the rest of the industry, protecting and enforcing the rules & regulations set forth by Credit Card Associations.

At the same time the merchant's card terminal transmits information to the merchant account provider regarding the transaction, the merchant account provider transmits information to its member bank.

We are still not finished with the trail of actions during the credit authorization process.

The member bank takes the transaction information and transmits it to the issuing bank (the bank that actually produces the credit card). For example, if you use a Chase Freedom Card the issuing bank would be Chase.

Note: You wont always see the issuing bank's brand on a credit card, but it is becoming more and more common to see them.

The issuing bank then logs the transaction information onto the consumer's card statement, which he/she can see on his account activity and monthly statement.

It's important to note that even after all this has happened, and the consumer has left the store with his/her goods, no money has changed hands yet.

Up to this point:

  1. The consumer has used a credit card to purchase goods.
  2. The transaction details were submitted from the card terminal to the merchant account provider (and back again to the terminal).
  3. The transaction was also transmitted to the member bank.
  4. The transaction was then transmitted from the member bank to the issuing bank.
  5. The issuing bank has logged the transaction onto the consumer's card statement.

Now, money needs to change hands.

What happens next is the issuing bank pays the member bank. The member bank pays the merchant account provider. The merchant account provider pays the merchant's bank account, where the merchant can access their funds.

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