Understanding Credit Card Authorization

Cardholders ultimately give businesses credit card authorization to request funds from their accounts. Authorization requests start when cardholders key in, swipe or insert their debit or credit cards through traditional credit card readers or Virtual Terminals. After waiting three to 22 seconds, depending on the business’s card reader speed, the transaction will either be approved or declined.

To the untrained eye, this process seems simple. Yet, there are a number of steps that are executed behind the scenes before a credit card authorization is complete.

The Financial Middlemen of Credit Card Authorization

Being aware of the financial middlemen involved in the process is critical to understanding credit card authorization.

• Merchant Account Provider: Work directly with businesses to process transactions. Providers facilitate communication between the Card Association’s network and businesses’ bank accounts.
• Payment Processor: Maintain the technical network that facilitates communication between the provider and the network. Processors are chosen by the provider’s bank and do not work directly with businesses.
• Card Association’s Network: Each card brand has its own association that sets rules and manages Interchange costs. This network of systems communicates with both the issuing and acquiring banks during the credit card authorization process.
• Issuing Bank: Financial institutions that issue credit cards (e.g., Capital One) to cardholders and back the Card Associations. Some associations double as an issuing bank (e.g., American Express).
• Acquiring Bank: Members of the Card Associations that have agreements with Merchant Account Providers to accept deposits via credit card transactions.

6 Steps of Credit Card Authorization

Every transaction undergoes the following six-step process to procure authorization and approve or reject a credit card payment.

1. The cardholder initiates a credit card authorization request by keying in, swiping or inserting his debit or credit card into the Merchant Account Provider’s system.
2. The Merchant Account Provider communicates the transaction information to its Payment Processor.
3. The Payment Processor, acting as the technical glue, communicates the transaction to the Card Association’s network.
4. The acquiring bank checks with the issuing bank via the Card Association’s network to determine whether the funds or credit are available. This ultimately determines whether the provider will approve or decline the transaction.
5. The acquiring bank communicates the information back to the Merchant Account Provider via its Payment Processor.
6. An approval or decline code is issued. If declined, the transaction will fail and a decline code will return. If approved, the transaction will process and the Card Association network will facilitate the transfer of funds from the issuing bank to the depository bank account of the business running the transaction.

After a successful credit card authorization, you have the option to hold or settle a transaction. If held, the transaction must be captured within a certain time frame, in accordance with the Card Association. This duration may vary per Merchant Account Provider, but held transactions typically must be settled within five to seven days. Otherwise, they will void. Settling a held transaction after the seventh day could result in a bank-initiated chargeback.

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Editor's Note: This post was originally published in October 2017 and has been updated for comprehensiveness and accuracy.