February 2, 2024
What is payment authorization: an updated guide
The world of online transactions and digital payments is complex and filled with various terminologies that can be overwhelming. One such critical concept is payment authorization, a fundamental process in every digital transaction. This article aims to cover the various aspects of payment authorization, making it easier for merchants and other stakeholders in the digital payment ecosystem to understand its importance and workings.
What is an “authorizing payment”?
Authorizing payment refers to the process where a merchant seeks approval from a customer’s card issuer to proceed with a transaction. When a customer purchases using a credit or debit card, the merchant sends a request to the cardholder’s bank and card network to verify that the card is valid and the account has sufficient funds. This step is crucial for securing transactions and ensuring a smooth payment process.
What is the importance of payment authorization?
The importance of payment authorization cannot be understated in e-commerce and online transactions. It serves as the first line of defense against fraud and helps protect the merchant and the customer. Verifying the card and ensuring sufficient funds reduces the risk of chargebacks, where customers dispute a transaction, often due to unauthorized use of their card.
The operation of card authorization step-by-step
Card authorization plays a pivotal role in the sequence of steps in the overall payment process, engaging multiple parties and stages. Let’s look into the card authorization procedure.
Initiation of payment by customer or merchant: The process starts when a customer makes a payment at checkout or when a merchant initiates a transaction using stored card details.
Sending an authorization request: The merchant’s payment interface sends a request to their acquiring bank, or payment processor. This request carries vital transaction information, including card details, 3DSecure data, initiator of the transaction (customer or merchant), the nature of the transaction (one-time or recurring), and the use of a network token, if any.
Request routing by the processor: The acquiring bank then forwards this request to the card network linked to the used card.
Card network’s communication with the issuer: The card issuer receives the request and evaluates it based on criteria like card validity and fund availability.
Issuer’s decision on transaction approval: The issuer either approves the transaction, providing an authorization code or declines it, issuing a decline or error code.
Issuer communicates transaction status: The card network overseeing the transaction conveys the issuer’s decision to the merchant’s acquiring bank.
Processor informs the payment gateway (or the merchant directly): The acquiring bank then informs the merchant’s payment gateway (or the merchant directly) of the issuer’s decision. The merchant, in turn, notifies the customer about the transaction’s authorization status.
Holding and settling funds: Upon approval, the customer’s account is temporarily held with the transaction amount. This hold is maintained until the payment is captured, indicating the funds transfer from the customer’s bank to the merchant’s account.
What is the status of payment authorization?
Understanding the status of payment authorization is essential for merchants. Once a payment is authorized, the customer’s bank approves the transaction. However, it’s important to note that authorization does not mean the funds have been transferred. It simply holds the amount on the customer’s card until the transaction is completed or the hold is released, typically within a few days.
What is authentication and authorization in payments?
Authentication and payment authorization are two sides of the same coin but serve different purposes. Authentication verifies the customer’s identity, ensuring that the person making the transaction is the rightful card owner. Authorization, on the other hand, checks the card’s validity and available funds. Both processes are integral to secure and successful online transactions.
What is the difference between authorization and payment?
The difference between authorization and payment is a key concept in digital transactions. Authorization is the process of approving the transaction, while payment is the actual transfer of funds from the customer to the merchant. Understanding this distinction helps in managing transactions and addressing customer queries effectively.
What are examples of authorization?
There are various examples of authorization in everyday transactions:
- A customer swipes their card at a retail store, and the transaction is approved by their bank.
- Online shopping where a customer’s card is pre-authorized before the final purchase.
- A hotel or a cruise puts a pre-authorization hold for an estimated bill amount before the final bill is presented.
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