When your business accepts credit card payments, how can you be sure your clients have the money to cover the sale? Thanks to payment authorizations, you’ll receive approval for a credit card payment directly from the card issuer or bank.
With all the credit card transactions being made today, payment authorization is a fast way to not only gain permission from a customer’s card-issuing bank to accept a credit card but also reserve the sales amount on your customer’s account. This ensures you get paid.
Let’s take a closer look at the credit card payment authorization process and discover what happens when you accept payment from a credit or debit card.
What is credit card payment authorization?
Payment authorization, also called credit card authorization, is a process that verifies a customer has enough funds to cover the amount to be paid on a sale. This authorization process applies to debit card transactions (where actual bank funds are verified) and other payment methods. Note that methods like PayPal or ACH often use different network infrastructures and specialized authentication protocols.
Basically, payment authorization enables businesses to confirm with the credit card company or bank that their customers have enough credit or money to cover their purchases. This authorization process is used with everything from Visa to Mastercard at many small and midsize businesses.
How does payment or credit card authorization work?
Now that we’ve covered the fundamentals of credit card authorization, let’s look into how the process actually works.
Step 1: The customer uses their credit card at checkout
Payment authorization starts when your customer offers a credit card for payment at checkout and inserts, swipes, or taps their card into your payment terminal. It might also begin when your client orders from your website and enters a credit card number in an online form. In some instances, credit card authorizations take place when a customer gives their number to one of your sales agents over the phone.
Step 2: An authorization request is sent to the bank
Once the data is captured, it is routed through a payment gateway to the card networks (like Visa or Mastercard). These networks act as a switch, identifying the customer’s issuing bank and routing the request for approval.
By analyzing the transaction information, the authorization switch (managed by the card network) determines which financial institution issued the card. It then securely sends the authorization request to the issuing bank for verification of funds/credit and card status.
Remember the roles: The issuing bank (the customer’s bank) makes the final decision on approval. The acquiring bank (partnered with your processor, like Stax) is the bank that receives the request and settles the funds into your merchant account.
Step 3: The request is approved or declined
After the bank verifies that your client’s credit is in good standing and has not exceeded the credit limit, your payment terminal receives an authorization message. This approval creates the authorization hold. However, the process isn’t complete. The merchant must then perform clearing (batching the day’s transactions) to confirm the final sale amount and submit the transaction for settlement—the final transfer of funds—which typically occurs the next business day.
A note about transaction fees
Every time a transaction is authorized, your business incurs a small authorization fee (often just a few cents). While the final transfer of funds (settlement) happens later, the costs associated with a transaction—including interchange and per-transaction fees—are triggered by the authorization and capture event.
A transaction that’s been authorized but not posted to a customer’s account appears as a pending transaction. This just means the money spent is no longer available in the customer’s credit line but has not been added to the current balance. In general, pending transactions clear after a few business days.
In many cases, the authorization amount and final transaction amount are identical. Sometimes, however, the authorization amount may temporarily differ from the amount of the actual purchase.
For example, hotels and rental car agencies often authorize a baseline amount. The same concept applies to restaurants and services where an initial amount is authorized, but the final tip is added later during the settlement process (known as tip adjustment).
Moreover, when a customer purchases gas at a gas station, the station authorizes a credit card for an amount close to a full tank of gas—usually $80 to $100—to make sure the card is valid. Once the charge appears on the customer’s credit card statement, it will be replaced with the actual amount spent on gas.
What data is checked during the credit card payment authorization process?
When a customer initiates a credit card payment, the authorization process evaluates multiple data points in real time to determine whether the transaction should be approved or declined. This all happens in seconds, but several critical checks occur behind the scenes to protect both the merchant and the cardholder.
These data points include:
- Credit card details and payment data
- Expiration date and error code validation
- Available credit and sufficient funds checks
- Fraud risk signals and authorization rates
Authorization holds, pending transactions, and customer expectations
Authorization holds and pending transactions are a normal part of the credit card payment authorization process, but they’re also a common source of confusion for customers. Understanding how these work helps merchants explain what’s happening and avoid unnecessary disputes or chargeback risk.
What an authorization hold means for a customer’s bank account
When a credit card payment is successfully authorized, the issuing bank places an authorization hold on the customer’s account. This hold temporarily reserves the transaction amount, reducing the customer’s available credit or available bank balance.
An authorization hold is not a completed charge. No funds have been transferred to the merchant yet, and the transaction has not been posted to the customer’s account. Instead, the hold ensures that the funds will be available when the merchant completes payment capture and submits the transaction for settlement.
For customers, this means their available balance may decrease immediately, even though the transaction has not been fully processed. For merchants, the authorization hold provides confidence that the customer has enough funds to cover the purchase.
Why transactions appear as pending on a credit card statement
Authorized transactions typically appear as pending transactions on a customer’s credit card statement or online banking portal. A pending status indicates that the payment has been approved but has not yet gone through the settlement process.
Pending transactions remain in this state while the merchant batches transactions, applies final amounts, or completes any necessary adjustments. Until settlement occurs, the transaction does not count toward the customer’s posted balance, even though the funds are temporarily unavailable.
This is why customers may see a charge listed as pending for several days, especially for online purchases, weekend transactions, or businesses that batch payments at the end of the day.
How long authorization holds typically last
Authorization holds are temporary and usually expire if the merchant does not complete payment capture within a specific time frame. In most cases, holds last anywhere from one to seven business days, depending on the card issuer, card network, and type of transaction.
Certain industries, such as hotels, rental car agencies, and travel providers, may place longer authorization holds to account for variable final charges. If the transaction is not captured within the allowed window, the hold automatically drops off the customer’s account, and the reserved funds become available again.
For merchants, capturing payments promptly helps reduce customer confusion, minimize declined settlements, and keep cash flow predictable. Clear communication about authorization holds can also help set expectations and prevent unnecessary support inquiries.
What happens if payment authorizations fail?
When payment authorizations fail, the issuing bank immediately sends a specific response code back to the terminal/gateway (e.g., 05 – Do Not Honor, 61 – Exceeds Withdrawal Limit). This code tells the merchant the exact reason for the failure, whether it’s insufficient funds, an expired card, or a fraud alert. When this happens, the transaction gets rejected, and there may be a check for suspicious charge activity.
Payment authorizations may also fail for technical reasons. This usually happens when issues with configuration or online submission cause problems with the information being supplied to the processor. In these cases, an error code gets generated, and the sale can’t be completed.
When payment authorizations fail, the seller should not complete the transaction until they receive proper authorization. Online businesses should also not ship any products until the issue gets fixed.
In most cases, the seller will need to fix technical problems that arise from payment authorization failure. Occasionally, however, the buyer may be having issues with their credit cards, debit cards, or device, and will need to resolve the problems from their end.
Notably, online credit card transactions inherently carry a significantly lower authorization rate than in-person transactions. Due to the increased risk of card-not-present (CNP) fraud, issuing banks apply more conservative logic for these payment authorizations than in-person credit card transactions. While this is great for preventing fraud, it can aggravate clients who receive faulty declines.
To combat faulty declines, merchants use 3D Secure—a protocol that adds an extra layer of authentication (like a one-time code or biometric) to prove the buyer’s identity. When successful, this added authentication step transfers the liability for a fraudulent chargeback from the merchant to the issuing bank, effectively increasing authorization rates for legitimate customers.
If you run an ecommerce business that uses a payment application programming interface (API) to authorize payments, it’s a good idea to offer your customers additional options if payment authorization causes their transaction to fail. For instance, you can prompt them for another payment method or ask them to re-enter their credit card information if they accidentally entered the wrong details. This helps retain customers and encourage repeat business at your online store.
Conclusion
Payment authorization helps prevent fraud and chargebacks from hurting your business. By ensuring your customers have enough money to cover their purchases, your business transactions will go much smoother. This in turn creates a positive merchant reputation for your business that will encourage more clients to do business with you.
Here’s the good news: The payment authorization process is largely automated and streamlined. Your payment processor works behind the scenes with banks to ensure that legitimate transactions made in your business go through with ease. That way, you can simply focus on serving your customers and generating sales.
At Stax, we implement payment processing technology to efficiently authorize your sales transactions while preventing fraud. Contact us to learn more.
FAQs about payment authorizations
Q: What is payment authorization?
Payment authorization, also known as credit card authorization, is a process that confirms whether a customer has sufficient funds to cover the retail price of a product or service. This process is applicable across debit card transactions and PayPal transactions, allowing businesses to verify the financial capacity of customers before proceeding with the sale.
Q: How does the payment or credit card authorization process work?
The payment authorization process involves three primary steps. First, the customer uses their credit card at checkout. Second, your client’s credit card information is sent through an authorization switch to the card-issuing bank for verification. Lastly, your payment terminal receives an authorization message provided the client’s credit stands good and doesn’t exceed the credit limit, allowing you to complete the sale.
Q: What does the term “authorization hold” mean in the context of payment authorization?
An authorization hold refers to a practice where merchants reserve an amount equivalent to the sales price on a customer’s credit card account. This is not a charge but rather a temporary freeze on those funds in the client’s account until the transaction is completed, ensuring the merchant gets paid.
Q: How does payment authorization impact transaction fees?
Every successful payment authorization leads to a transaction fee that your business will have to bear. The amount varies and should be considered as part of your overall sales expense. This fee is in place due to the administrative and processing work involved in carrying out the authorization.
Q: What happens during the payment authorization process if a credit card is determined as lost, stolen, or past its expiration date?
In such cases, the bank or credit issuer flags the card, causing the transaction to be deemed suspicious and potentially fraudulent. As a result, the transaction gets rejected, and there may be a check for unusual charge activity. It’s crucial not to complete the transaction until you receive proper authorization.
Q: Why might online credit card transactions have lower authorization rates?
Online credit card transactions often have lower authorization rates due to the higher associated risk of fraud. Issuing banks implement more stringent criteria for these payment authorizations. Offering customers additional options such as alternative payment methods or re-entry of accurate information can assist in retaining customers and promote repeat business.
Q: What are the benefits of using payment authorization for a business?
Payment authorization helps prevent fraudulent transactions and chargebacks, ensuring your customers have enough money to cover their purchases. This smoothens your business transactions, builds a positive reputation, and encourages more clients to conduct business with you.
Q: What happens if payment authorizations fail due to technical issues?
Technical issues, such as problems with configuration or online submission, might cause issues with the information being supplied to the processor. Such glitches will generate an error code, and the sale cannot be completed until they’re resolved. The seller usually needs to fix these technical issues that arise from payment authorization failure. However, sometimes, the buyer might have issues with their cards or devices and might need to rectify the problems at their end.
Q: What role does a payment processor play in payment authorization?
The payment processor assists with the backend process with banks to ensure valid transactions go through seamlessly in a business. They efficiently authorize sales transactions, thereby freeing up the business to focus on serving its customers and driving sales.
Q: How do payment authorization rates differ between in-person and online transactions?
Online credit card transactions generally have significantly lower authorization rates compared to in-person credit card transactions. The increased risk of fraud inherent to online purchases prompts issuing banks to utilize more conservative logic for online payment authorizations.
