Payment authentication vs. payment authorization: key differences explained

In the world of online payments, two critical processes often determine whether a transaction goes through smoothly or fails: payment authentication and payment authorization. While they might sound interchangeable, these two steps play very different roles in the payment process. Payment authentication is all about verifying that the person initiating the transaction is who they say they are, while payment authorization focuses on whether the transaction itself is approved by the bank or payment processor.

Understanding these two processes is key to minimizing fraud, ensuring secure transactions, and improving overall payment success rates. In this guide, we’ll dive deep into the distinctions between payment authentication and payment authorization, explaining how they work and why both are essential for a seamless transaction experience.

What is payment authentication?

Payment authentication is the process of verifying the identity of the person or entity making a payment. It ensures that the payment request is coming from an authorized source, typically the cardholder or account owner. Authentication is the first line of defense in preventing fraud and unauthorized access to financial resources.

How payment authentication works

Authentication methods have evolved with advances in technology. Here’s how it typically works:

1. Password or PIN Verification: The most basic form of authentication is the use of passwords, PINs, or answers to security questions. The user must input the correct information for the transaction to proceed.
2. Multi-Factor Authentication (MFA): MFA combines two or more forms of verification, such as a password and a one-time passcode (OTP) sent via SMS or email. This adds an additional layer of security.
3. Biometric Authentication: Increasingly, biometric authentication—such as fingerprint scanning or facial recognition—is being used to verify the user’s identity.
4. 3D Secure Protocol (3DS): This is a widely used security protocol for online card transactions, adding an extra verification step by redirecting users to their card issuer’s authentication page.

Authentication is crucial because it prevents unauthorized users from initiating payments, protecting both the merchant and the cardholder from fraud.

What is payment authorization?

Payment authorization is the process by which a payment is approved or declined by the issuing bank or financial institution. It occurs after authentication, ensuring that the customer has sufficient funds or credit to complete the transaction.

How payment authorization works

Once the payment is authenticated, the transaction moves into the authorization stage. Here’s how the process typically works:

1. Transaction Request: After authentication, the payment request is sent to the issuing bank or payment processor.
2. Fund Verification: The bank or payment processor checks whether the customer has sufficient funds or available credit for the transaction.
3. Approval or Decline: Based on the customer’s account balance and other factors, the payment request is either approved or declined.
4. Hold on Funds: If approved, the funds are held until the transaction is completed and settled. If declined, the transaction does not proceed, and no money is debited from the customer’s account.

Payment authorization is essential for ensuring that the transaction is valid and that the merchant will receive payment for the goods or services provided.

Curious about how payment tokens can secure your transactions? Learn more in Understanding Payment Tokens: A Comprehensive Guide for Business Owners to explore how tokenization enhances payment security.

Key differences between payment authentication and payment authorization

While payment authentication and payment authorization are closely linked, they serve different purposes in the transaction process. Understanding these differences can help businesses optimize their payment workflows and reduce the risk of transaction failures.

1. Purpose

• Payment Authentication: Focuses on verifying the identity of the person making the transaction. It ensures that the payment request is initiated by the rightful account owner or cardholder.
• Payment Authorization: Involves the approval or rejection of the payment by the issuing bank, ensuring that the customer has sufficient funds or credit for the transaction.

2. Timing

• Payment Authentication: Occurs first in the transaction process, before the request is sent to the issuing bank for authorization.
• Payment Authorization: Takes place after authentication and involves verifying the account balance or credit limit.

3. Responsibility

• Payment Authentication: Is often the responsibility of the payment gateway or merchant, with assistance from authentication tools such as 3D Secure or biometric verification.
• Payment Authorization: Is handled by the issuing bank or payment processor, which assesses the account’s ability to complete the transaction.

4. Impact on Security

• Payment Authentication: Plays a critical role in preventing fraud by ensuring that only authorized users can initiate a transaction.
• Payment Authorization: Protects merchants by ensuring they will be paid by verifying that funds or credit are available before completing the transaction.

Why both processes are essential for secure transactions

Both payment authentication and payment authorization are vital for ensuring secure and successful transactions. Here’s why:

1. Preventing Fraud: Authentication reduces the risk of fraud by verifying the identity of the user. This step is particularly important in preventing card-not-present (CNP) fraud, which occurs in online transactions.
2. Ensuring Payment Validity: Authorization ensures that the transaction is valid by confirming that the customer has the funds or credit available to complete the purchase. This step prevents the merchant from fulfilling orders that will not be paid for.
3. Boosting Customer Confidence: When customers know that robust authentication and authorization processes are in place, they feel more secure in making purchases, which can lead to increased trust and loyalty.

Best practices for optimizing authentication and authorization

To ensure that both payment authentication and authorization work seamlessly, consider these best practices:

1. Implement Strong Authentication Methods: Using multi-factor authentication (MFA) and biometric verification can significantly reduce the risk of fraud. These methods add layers of security that make it difficult for unauthorized users to bypass the system.
2. Adopt 3D Secure Protocols: Implementing 3D Secure (3DS) adds an extra layer of authentication, especially for online transactions. It’s widely accepted by major card networks and provides an additional checkpoint before payments are authorized.
3. Monitor Authorization Rates: Keep an eye on your authorization rates. Low approval rates may indicate an issue with how transactions are being processed or flagged. Optimizing these rates can help improve overall transaction success.
4. Partner with Reliable Payment Gateways: Ensure that your payment gateway is equipped with advanced authentication and authorization capabilities. This helps reduce payment failures and provides better fraud protection.
5. Analyze Declines: If you notice an increase in declined transactions, analyze the reasons behind these declines and take steps to address them. Understanding whether declines are due to authentication or authorization issues can help improve your transaction success rate.

Want to know how vaulting and tokenization protect sensitive payment data? Check out What Is Vaulting and Tokenization? for a deep dive into these powerful security tools.

FAQs about payment authentication and payment authorization

What happens if payment authentication fails?

• If authentication fails, the transaction does not proceed to the authorization stage, and the payment is declined. The customer may need to verify their identity or provide additional information to retry the payment.

Can a payment be authorized without authentication?

• While some transactions may bypass authentication (particularly for small amounts or trusted merchants), skipping authentication increases the risk of fraud. It is generally recommended to authenticate payments for security reasons.

What is the role of a payment gateway in authentication and authorization?

• A payment gateway handles the authentication process by verifying the customer’s identity and securely transmitting the payment request to the issuing bank for authorization.

Why do some payments get declined after being authenticated?

• Even if a payment is successfully authenticated, it can still be declined during the authorization stage if the customer doesn’t have sufficient funds, has exceeded their credit limit, or if the transaction triggers a fraud alert.

How can businesses improve their authorization rates?

• Businesses can improve their authorization rates by partnering with reliable payment processors, ensuring correct transaction data is provided, and monitoring authorization trends to identify and address issues.

Payment authentication and payment authorization are two distinct yet interconnected processes that play a crucial role in secure and successful transactions. Authentication focuses on verifying the identity of the person making the payment, while authorization ensures that the transaction is valid and the funds are available. Both steps are essential for protecting businesses and customers from fraud and ensuring smooth transaction flow.

To learn how to improve your payment processes and ensure secure, seamless transactions, contact Gr4vy today and explore our advanced payment solutions designed to enhance your business’s payment experience.