Credit Authorization

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."
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What Is Credit Authorization?

Credit card authorization is the process of ensuring there are enough funds in a cardholder’s account to complete a transaction. A valid authorization also shows that the cardholder’s card is in good standing and has not expired.

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".

Credit Card Authorization Explained

Authorization is the first half of the transaction process. When you or your customer insert or swipe a card, your system requests an authorization. 

One purpose of this process is to ensure the customer has enough funds to process the transaction. 

The other purpose of authorization is to ensure that the cardholder’s card is in good standing. This means that, for example, the card hasn’t expired and has not been reported lost or stolen. 

During authorization, your point-of-sale system contacts your acquiring bank electronically through a payment network. The acquiring bank then passes the request to the customer’s issuing bank. 

The issuing bank responds with either an approval or a decline. If the issuer approves, they send an approval code, and the transaction is added to your batch. If they decline, you’ll typically need to request another form of payment. 

There are several reasons a transaction can be declined. The customer might be making an unusually large purchase. They could also be traveling, and their issuer noticed the location change. These are both common reasons for an issuing bank to decline a transaction. 

Whether the transaction is approved or declined, the entire authorization process takes a few seconds to complete. 

The second half of a transaction is settlement. When you have a batch of authorized transactions, you’ll need to settle them to receive payment. 

During settlement, the cardholder’s issuing bank charges the customer for the transaction. They then transfer funds to your bank, which pays you. 

Credit Card Authorization Examples

Example 1

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.

Example 2

Ray is a cashier at a convenience store. Ray’s customer, Lisa, is getting ready to pay for her items. She inserts her Visa credit card into the credit card machine (terminal) so that it can read her card’s chip. 

The terminal displays a message that reads “Authorizing: Do Not Remove Card.” During this time, the terminal automatically sends an authorization request.

Lisa’s issuing bank, which is the bank that issued her card to her, receives the request. Through an automated process, they determine whether to approve the transaction. Lisa has enough money available on her card to cover the transaction amount of $15.00. She has not reported her card lost or stolen, and it is not expired. 

The issuing bank responds to the request with an approval. They send an alphanumeric approval code, and the terminal shows that the transaction was approved.

The authorization process is now complete. The credit card machine prints a receipt, which Ray gives to Lisa. 

Ray’s next customer is Monica. Monica inserts her chip card to pay for her transaction. The terminal sends an authorization request. 

However, in this case, Monica’s card has expired. The issuing bank responds with a decline, and the terminal shows that the transaction was declined. Ray asks Monica for a different form of payment.

That evening, the machine automatically settles the day’s batch, including Lisa’s transaction. Monica’s transaction is not included since her bank declined it. 

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