Credit Card Authorization Explained

Credit card authorization is required for every credit and debit card purchase. So if you’re a business that accepts credit cards or a consumer that uses credit cards to make purchases, you’ve been involved in the credit card authorization process. 

According to Capital One, there are 1.86 billion credit card transactions globally per day, on average—and all of them require authorization.

While credit card authorization is such a routine part of processing payments, very few people actually understand how it works. It’s much more complex than simply verifying whether a cardholder has enough money to complete a transaction. 

For businesses, understanding how credit card authorization works is crucial. This makes it easier for you to identify why some card authorizations fail so you can prevent that from happening and ensure your customers can enjoy a smooth buying experience. 

This ultimate guide explains everything you need to know about card authorization, including what it is, how it works, and reasons why authorizations fail. We’ll also compare authorization against similar terms and provide you with a deeper understanding of how authorization holds work. 

What is Card Authorization?

Card authorization refers to the approval from a credit or debit issuer—most commonly, a bank or credit union. Approved authorizations mean that the cardholder has sufficient funds in their account or sufficient credit to cover the cost of a purchase.

Authorization is the first step in processing payments. 

Once a cardholder swipes, dips, taps, or otherwise enters their card details, an authorization request is immediately sent to the card issuer to verify the validity of the card and purchase. 

How Does Card Authorization Work in Payment Processing?

The card authorization process is typically facilitated through a payment processor. While the processor doesn’t actually approve or deny any details, they provide the technology that allows for the business, issuing bank, and acquiring bank to communicate. 

Here’s a step-by-step process that explains how the card authorization works:

1. The cardholder uses a credit or debit card to pay for something.
2. The POS system or virtual terminal sends a request to the processor acquiring bank, requesting authorization. 
3. The acquirer sends the request to the issuing bank through the card network, requesting approval.
4. The issuing bank ensures the card is valid and there are sufficient funds to cover the transaction. 
5. The issuing bank returns a decision regarding authorization—approved or declined.

Assuming everything is valid with the authorization request, the approval will be returned with an authorization code. Similarly, if the missing bank says that the transaction is not authorized, then the decline code will also be accompanied by an error code.

We have a complete guide that covers credit card authorization codes in greater detail, which you can use as a reference to compare different reason codes. 

The entire authorization process is handled in just a few seconds at most. By the time that a cardholder presents their card and the transaction gets approved, all of the steps above have already happened behind the scenes. 

Card Authorization vs. Capturing in the Payments Process

In the world of payment processing, the terms “authorization” and “capture” are commonly confused with each other. But they’re actually two completely different things. 

As previously discussed, the authorization process occurs when a merchant initiates a charge to a customer’s credit or debit card. This can happen in person, online, or over the phone. As long as the card has been used in an attempt to pay for something, the authorization must happen before the card can actually be charged.

Capturing happens once the transaction has been completed. This is when the merchant requests that funds from the cardholder’s account get moved to the merchant’s account—changing the status of the transaction from pending to complete. 

Money doesn’t actually move during the authorization process, and the card capture can’t occur until the authorization process has been completed and approved. 

The timeline for capturing can vary. But the majority of card authorizations expire within five to ten days, so processors typically capture funds within that window. 

Authorization vs. Settlements For Card Payments

Settlements occur after the authorization and capture process. The settlement transfers the funds from the issuing bank (cardholder’s bank) to the acquiring bank (merchant’s bank). 

Here’s how it works:

1. The issuer approves available funds for a purchase (authorization).
2. The acquirer requests funds for the transaction associated with the approval (capture).
3. The money moves from the issuing bank to the merchant’s account (settlement).

Let’s say you’re using a food delivery app to order dinner. The app estimates the cost of the meal, plus tax and tip. But sometimes certain food items may be unavailable at pickup, or you may want to adjust the tip based on good or bad service upon delivery. 

So the initial price at checkout when you’re ordering may not necessarily be the final purchase process. But the app still needs to get authorization from the issuing bank to ensure there are enough funds or credit to cover the order. 

When the order is first submitted, authorization is requested. If approved, a hold amount for the estimate is placed on the card. Once the food has been delivered, the tip has been added, and the final transaction amount is official, the processor will request for that amount to be captured. Then the settlement occurs when the funds are officially moved from the customer to the business. 

Credit Card Authorization Forms Explained

Credit card authorization forms are official documents that give businesses permission to charge a cardholder’s credit card. These are commonly used for subscriptions or recurring payments, but they can also be used for large purchases—such as a vehicle or computer. 

These forms can be filled out digitally, but they can also be filled out and signed in person.

Typically, businesses use card authorization forms if they’re planning to charge a credit card at a later date or time when the card itself and the cardholder are not present. 

Information that’s commonly collected on a credit card authorization form includes:

• Name of cardholder
• Credit or debit card number
• Card network
• Billing zip code
• Name of business
• Statement that authorizes the charges
• Cardholder signature and date signed
• Purchase amount

Some forms contain additional language to explain that the authorization covers recurring payments and not just a one-time purchase.

Card Authorization Holds Explained

Authorization holds reduce the availability of credit or funds in a cardholder’s account to prevent them from overdrawing before the funds are moved to the merchant’s bank account. 

Card authorizations are used to ensure a cardholder’s credit or account balance reflects the available balance, even if pending transactions haven’t been settled. 

Here are two examples to explain how this works.

First, let’s say a customer has $200 in their checking account and uses a debit card to pay for something that costs $150. The authorization will be approved because there are enough funds to cover the purchase. But the money doesn’t instantly move from the customer’s bank to the merchant’s bank—so a $150 authorization hold needs to be placed on the account.

Without the hold, the cardholder could end up purchasing something else for $100 before the settlement, which would cause the account to be overdrawn by $50. 

Hotels are another example of a business type that commonly uses authorization holds. 

Let’s say someone checks into a hotel that costs $200 per night, and they’re staying five nights for a total of $1,000. Rather than just charging the guest $1,000, the hotel may require an additional hold of $500 to cover incidentals. 

So if the guest dips into the minibar, charges food to the room, or breaks a lamp, there will be enough funds to cover these additional costs. If they only charge $100 worth of food to the room and there’s no damage, the remaining $400 from the initial hold will be lifted at a checkout, and $1,100 total will be charged. 

Reasons Why Card Authorizations Fail

There are three common reasons why credit card authorizations fail—security problems, financial issues, and technical problems. Here’s a deeper explanation of each:

Security

The authorization process is the first step of defense against fraud. So if a card has been lost, stolen, or frozen, the issuer will immediately reject the authorization and check to see if there’s any other suspicious activity on the account. Expired cards can fail for security reasons. 

Finances

Insufficient funds or credit will also lead to a failed authorization. If there isn’t enough money in a checking account to cover the purchase or if the cardholder has reached their credit limit, then the authorization won’t be approved. 

Technical

Sometimes technology can fail during the authorization request. This can happen if the business is using faulty equipment or if there’s an issue with an online transaction. Often re-attempting the authorization request can be enough to get approval. But the merchant or customer will need to refer to the denial reason and follow any instructions.

Final Thoughts

Card authorization happens every single time a payment gets processed using a credit or debit card. This holds true for every transaction environment, including in-person payments through a POS system, online payments through a gateway, or recurring payments on file. 

I hope this guide gave you a better understanding of how the authorization process works. This is important information to ensure cards are processed properly, and customers have a smooth buying experience.