What is Credit Card Authorization?

Nov 3, 2023

Every credit card transaction goes through the authorization process—a series of steps that verifies whether a card is valid, whether the cardholder has sufficient funds or credit limit to cover the transaction, and ensures the transaction isn’t fraudulent.

How Credit Card Authorization Works

Credit card authorization involves five parties:

  • The customer or cardholder
  • The business
  • The customer’s credit card issuer, or issuing bank
  • The acquirer, or business’s acquiring bank
  • The business’s payment processor

Steps Involved in Credit Card Authorization

  1. The authorization process initiates when a cardholder presents their credit card for payment at a merchant’s point of sale (POS) terminal, website, or mobile app.
  2. The POS sends an authorization request to the merchant’s acquiring bank or credit card processor through a payment gateway. The request includes transactions details like the purchase amount.
  3. The merchant’s acquiring bank transfers the request to the cardholder’s issuing bank through the card network.
  4. The issuing bank receives the authorization request and verifies whether the card is valid and the account has enough funds or available credit for the transaction.
  5. The issuing bank responds to the merchant’s request with an authorization code or a decline message. If approved, the authorization code confirms that the transaction can proceed; if declined, it indicates that the transaction is not authorized.

If the authorization is approved, the merchant completes the transaction, and the funds are reserved on the cardholder’s account to cover the purchase.

Credit Card Authorization Hold

A credit card authorization hold is temporary freeze on specific amount of a credit card’s available credit limit. The card issuer places a hold on the cardholder’s account when a transaction is initiated. This can prevent the cardholder from using that credit limit for other purchases before the transaction is complete. In other cases, an authorization hold is used to verify a cardholder’s card information before setting up a recurring payment. The authorization hold may last anywhere from a few minutes to 30 day, but will typically drop once the transaction is complete.

What Happens If Authorization Fails?

When an error occurs during this authorization process, it means that the authorization could not be successfully completed. There are a few causes of credit card authorization errors.

  • Insufficient Funds. This happens occurs when the available balance on the credit card is not enough to cover the cost of the transaction. In these cases, the transaction is typically declined.
  • Card Not Valid. If the credit card is expired, blocked, or reported as lost or stolen, the authorization will fail, and the transaction will be declined. Input mistakes can also trigger this error.
  • Declined by Issuing Bank. The card issuer may decline a transaction for a variety of reasons including suspicion of fraud, unusual activity, or card restrictions.
  • Network Connectivity. Authorization errors can also happen if there are connectivity errors between the merchant’s processing system and the payment gateway or the credit card issuer.
  • Payment Gateway Issues: Problems with the payment gateway’s servers or system can lead to authorization errors.
  • Transaction Amount Limits: Some credit cards have daily spending limits. If a cardholder’s transaction exceeds this limit, an authorization error may occur.
  • Address Verification Issues: In some cases, credit card authorization may require address verification. If the billing address provided by the customer does not match the address on file with the credit card issuer, the transaction may be declined.
  • CVV Mismatch: Authorization may fail if the Card Verification Value (CVV) code doesn’t match the one on file with the issuer.

Sometimes the business and cardholder are given an explanation for a failed authorization depending on the card issuer, payment processor, gateway or POS, and location of the transaction (online or in person). The cardholder may be able to complete the transaction by trying their card again, using another payment method, or trying again later.

Conclusion

Credit card authorization is an essential part of payment processing that protects both consumers and businesses by preventing fraud and ensuring transactions are legitimate. Fortunately, the authorization process is streamlined, automated, and happens within milliseconds. In the majority of situations, there’s nothing for business owners to do. Your payment provider does the work behind the scenes, leaving you to focus on providing optimal service to your customers.

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