Explaining the Credit Card Authorization Process

Merchant Warehouse |

December 2, 2011

If you don’t know how a credit card authorization really works, you are operating at a disadvantage. It is important that you know what happens to all of the information from the credit card once it’s swiped, then run through a terminal or other POS system.

Once a credit card has been swiped, or the numbers keyed, and the initial authorization process has begun, it is then sent to a credit card processor. From that point, all of the information is transmitted through a bankcard association and then directed to the card-issuing bank. Once there, the transaction is then either approved or declined. Finally, the bankcard association will transmit the approval or the denial. If the card is in fact denied, that information is then transmitted back to the card terminal alerting the merchant.

Anytime during the credit card authorization process, a card could be declined if it has recently expired or has insufficient funds. Another reason a transaction might end up being declined is if the card has been reported missing or if there has been any suspicious activity on it. For years now, in order to protect businesses, all banks have required credit card authorization for all transactions.
In order to facilitate credit card use and initiate credit card authorizations, businesses are required to apply for and open a merchant account. Once a merchant has their account set up, only then will a credit card authorization take place through the system.

Online or Batch Mode

Most transactions do get approved and therefore “authorized transaction” really refers to the point at which the request for credit has been approved (authorized). Credit card companies have the option of using two different processes to handle credit card authorizations – online or batch mode – and the most appropriate procedure depends primarily on the credit card company’s particular requirements.

With online credit card authorization, the whole process is completed in several seconds. In this process, every transaction is separately authorized at the time that the individual transaction occurs. If the charge request is denied, the cardholder is promptly informed of the fact that the transaction could not be completed. As t his could occur for any number of reasons, the particular reason for one particular denial is not normally transmitted back to the originating terminal.

The merchant in this case will be informed simply that the card was “declined,” although there are ways to communicate to the merchant that a phone call should be made to the processing firm concerning possible fraud or other matter. Normally, however, it is up to the customer to contact their credit card issuer and determine the status of the account. This is not something that will usually take place in the store or in a chat window online.

At other times, a credit card company may use a “batch” credit card authorization process. This is particularly true when there are large volumes of transactions. It may be more efficient in some cases to defer the processing of the transactions until a scheduled time, such as at the end of the business day. Of the course, batch processing has its downside, and may not be appropriate in all situations.

For example, batch credit card authorization processing is ideal for transactions, such as those done online for subsequent shipping or pickup, where the customer is not expecting services or products at the time the card is being presented. This is also the case with mail-order merchants or any other situation in which the cardholder doesn’t communicate directly with the company.