Credit Card Authorization Explained

Payments Learning Resources

Credit Card Authorization Explained

Ever wondered how credit card authorization actually works, the potential bank responses that prevent a successful transaction and what are considered its main advantages? Then read on for all the information you need. 

What is Credit Card Authorization?

credit card illustration approved and rejected

What is pre authorization on a credit card?

Put simply, a credit card authorization is approval given by an issuer that a prospective customer has sufficient funds available on their card to pay for the transaction that they wish to make.  This approval is generally granted where the customer details are accurate and there are enough funds in their account.  If this is the case, a credit card authorization hold occurs, and then the specified amount is deducted from the customer’s account.

What occurs during the CC payment authorization process?

A payment authorization or credit card authorization process involves the customer, the seller/ merchant, the acquiring bank - who handles the payments on behalf of the merchant - and the issuing bank – who issued the customer’s card.

First, the customer submits their credit details to make a purchase and the merchant sends a request to the credit card processor/acquirer, such as Powercash21.  The acquirer then submits a request to the issuing bank which will review the customer’s account to confirm that the card is valid and sufficient funds are available for the transaction.  If the check is positive then a credit card authorization hold is placed on the customer’s account and the acquirer will receive a code of approval.  If the transaction is canceled an error code will be sent to the acquiring bank.

Authorization holds in further detail

credit card graphical illustration overlapped with stop sign

So, what is an authorization hold?

An authorization hold is a process of holding the transaction funds which will then be captured from the cardholder’s account.   Some acquirers might capture the funds right after authorization.  Also commonly referred to as pre-authorization, a merchant can use these holds to ensure that they get paid for specific transactions that are paid for via credit or debit cards.

When do pre-authorization debit card or credit card checks occur?

There are two main steps during the completion of a card transaction: The authorization of the process and the settlement of the transaction.

The pre-authorization checks take place during this first step.  It does not involve a transfer of funds, it is merely the bank telling the merchant that adequate funds exist and the transaction can be completed.  The issuer creates an authorization key to protect the card information while it is transmitted between the parties involved in the transaction process.  Specifically, an authorization key or authorization code consists of a maximum of six digits and is generated through a combination of transaction data and credit card information.

The possible bank responses to the merchant

approved and rejected illustration of credit cards being used on eftpos machines

When the cardholder details are transmitted to the issuing bank, the merchant can receive a number of responses relating to whether the customer’s card can be used for the transaction.  The responses that a merchant can receive include:

  • Approved – The account is acceptable. In other words, there is no report that the card is lost/stolen and there are enough funds to cover the purchase.
  • Partially approved - The account is acceptable and the card has not been reported lost or stolen but there could potentially not be enough funds to cover the purchase.
  • Declined - The account is not approved.  The card has either been reported lost or stolen or there aren’t sufficient funds to make the purchase.
  • Referral - The bank is informing the merchant that there is a problem regarding the credit card number.  The customer is required to contact the issuing bank to amend this.
  • Incorrect PIN number - The transaction was rejected because the incorrect PIN was entered during the transaction process.
  • Card expiration - The credit card has expired.  The customer can attempt to enter the expiration date again or use a card that is current.
  • Pick up card - This bank directive is generally made after the transaction has been declined and the merchant is requesting to retain the actual credit card (this could occur because of a reporting of the card as lost or stolen, the card was used for a fraudulent transaction, or if the account was closed).

Why is an authorization hold so important?

credit card and lock pictured against white background

A credit card authorization hold or debit card authorization hold is very important in the payment process.  By holding the transaction funds, merchants can prevent disputes as the transaction is not considered complete yet.  The time needed to finalize the transaction can be used by merchants to validate the card using security checks.  Another reason that credit card authorization is vital during payments is to minimize refunds.  Most merchants hold the transaction amount until they ship the purchase.  This way they can simply release the hold and not issue a refund if a customer decides to cancel the order before the product’s shipment.

How long do credit card pre authorizations last?

The card authorization time limit refers to the timeframe in which an approval response can be considered as valid for a specific transaction.  But how long does a credit card authorization last? In general, there is no standard time limit as a credit card authorization hold might be valid for 24 hours, 7 days, 31 days and so on. The duration of the hold varies depending on the four-digit Merchant Classification Code (MCC) and the transaction type.  

The advantages of credit card authorization

The main advantages of the credit card authorization function include:

  • Saves money and lowers costs. Credit card authorization prevents the need to issue refunds as the transaction amount is on hold and not captured yet.
  • Customer satisfaction. Announcing to customers that their cards won’t be charged until the items are shipped, for example,  helps build trust and reduces cart abandonment issues.
  • Reduces the risk of chargebacksAs mentioned earlier, the sale amount is not captured when a credit card authorization hold is in place.  This means that the customer cannot request a chargeback as they have not been charged yet.  This also provides a window to identify potential fraud by checking if the card is valid and not stolen. 

Contact Powercash21 today to discuss how pre-authorizations can work with your business model and how to utilize pre-authorization as part of your risk management strategy.

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