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Credit card authorization: What it is and how it works

Credit card authorization is an essential process that verifies the legitimacy of a card payment. Most credit and debit card payments undergo this behind-the-scenes check to protect businesses from losing money and detect possible cybercrime. Let’s explore how credit card authorization works and why it is important in cybersecurity.

Credit card authorization: What it is and how it works

What is credit card authorization?

Credit card authorization is a check merchants perform whenever you pay for something using your bank card. It’s designed to ensure you have sufficient funds to cover the transaction and check the card information for any red flags. The process is also known as payment authorization or card purchase authorization. Here’s a more detailed definition.

Card purchase authorization definition

Card purchase authorization is a security process during which a card-issuing bank approves or declines a transaction initiated by the cardholder. This ensures the card is valid, has not been reported as lost or stolen, and has enough money or credit available for the transaction.

With the rise of credit card usage in the mid-20th century, we needed an efficient, secure, and rapid authorization mechanism. Initially, verifications were done manually through a phone call. But as technology advanced and electronic point-of-sale systems and online gateways emerged, it allowed to automate and streamline the authorization process.

How does credit card authorization work?

Credit card authorization involves several steps to ensure everything looks good and a transaction can go ahead. Here’s how payment authorization works.

  1. Imagine a customer buying something using their credit or debit card. They may complete an online purchase, get something in-store, or order something by phone. No matter how they pay, the card payment process always requires card authorization.
  2. The company’s payment processor (e.g., Stripe or PayPal) sends an authorization request to the business’ acquiring bank — the financial institution that lets the merchant accept credit and debit card payments for their products or services.
  3. The business’ acquirer sends the request to the credit card issuer via the relevant card network (e.g., Visa, Mastercard, or American Express).
  4. The issuing bank reviews the payment authorization request. The bank checks the cardholder’s information to see if they can approve it (i.e., whether the card is valid) and if the cardholder has sufficient funds for the payment.
  5. After reviewing the request, the issuing bank returns a decision to the merchant. If everything looks okay, the transaction is approved, and the acquirer receives an authorization code. However, if the issuer determines that the transaction can’t be approved, they decline it and send an error code indicating why it was rejected.
  6. If the business’ acquirer receives an error code, the transaction isn’t completed. Depending on the reason the payment authorization failed, the buyer may try again. In some cases (e.g., if the card appears to be stolen), the issuer may look into the account further to understand what’s going on.

Despite all these steps and parties involved, payment authorization takes just a few seconds. Think of it the next time you pay for something — it’s the short amount of time between tapping your card on the card reader and seeing a “payment approved” message on the screen.

All transactions (online, in person, and over the phone) follow the same fundamental card authorization process, apart from minor differences relating to the payment method. In-store payments include POS (point-of-sale) machines, while online transactions don’t. Instead, an online customer completes a digital payment form with their card number, expiration date, and CVV code. With phone orders, customers provide their card information over the phone, with the rest of the process staying the same.

What is an authorization hold?

An authorization hold is when your card’s issuer sets aside the sum required to complete the authorized transaction. You may recognize this on your banking app as a “pending payment.” This step only comes after a successful payment authorization — it won’t happen if a transaction is declined.

An authorization hold means the money is “on hold” for the transaction, reducing your available credit. Since many transactions are not instant (it takes a few days for the money to leave your account), authorization holds are important in ensuring customers aren’t spending more than their line of credit allows.

An authorization hold lifts automatically when a payment is finalized, and the money leaves your account. If you don’t check your banking app often, you may not even notice a hold is in place because it typically lifts in a few days.

Payment capture and settlement explained

Payment authorization verifies that the transaction can go ahead — but the money doesn’t leave the buyer’s account immediately. After payment authorization come the two final stages of the payment process, known as capture and settlement. Here’s a quick, simplified summary of what happens at each stage.

  1. Payment authorization. Payment authorization is when the card issuer confirms the transaction is good to go (i.e., the card is valid and the customer has enough money to pay). When the business’ acquirer gets the green light, the card issuer reserves the right amount for this transaction, making it unavailable for other purchases.
  2. Payment capture. Once the payment is authorized, the merchant’s acquiring bank asks for the funds to be sent from the cardholder’s account to the bank. Because most card authorizations expire within five to ten working days, merchants typically capture the funds within this timeframe.
  3. Payment settlement. Settlement is when the funds for the transaction are transferred from the customer’s account to the acquiring bank. The amount of time between payment capture and settlement varies depending on several factors, such as the payment method, payment processor, and the merchant’s agreement with the acquiring bank. However, typically, it takes somewhere around one to three business days.

Here’s a practical example of how the whole payment process works from start to finish.

Imagine you’re purchasing an item of clothing online for $100. After you tap “Buy now,” the authorization process takes place. If you have enough available funds in your account and everything looks good, the purchase is authorized, and you will likely see an order confirmation page. The money for this transaction is placed on hold, reducing your available balance.

Once the order is confirmed, the merchant’s acquiring bank asks for payment. In the meantime, you may see that the transaction appears on your banking app as pending. Finally, several days later, the money leaves your account and reaches the merchant.

How long does a credit card authorization last?

The duration of credit card authorization (or authorization hold) varies greatly. In transactions with immediate payment capture, the hold may only last a few minutes. However, in some cases, an authorization hold may last for a month or more. For example, hotels and car rental companies may place authorization holds on the day of the reservation but take the money at a much later date. How long an authorization lasts depends on several factors, such as the payment processor, transaction amount, and merchant policies.

Why credit card authorizations fail

Credit card authorizations may fail for several reasons, which can typically be categorized into three groups.

  • Security reasons. Payment authorization may reveal security issues, causing it to fail. For example, it may show that the card the buyer used is marked in the system as lost, stolen, or frozen, which is a major red flag. As a result, the authorization would fail, with the account likely to be investigated further.
  • Technical issues. Sometimes, payment authorization may fail because of technical problems. For example, the user may incorrectly type a value, causing a problem with the online submission. In rare cases, the acquiring bank may be experiencing technical issues. In these cases, the buyer and seller have to wait until these are fixed.
  • Insufficient funds. If a customer doesn’t have sufficient funds to cover the cost of the transaction, the payment won’t be authorized. Some bank accounts offer overdraft services that let buyers proceed with transactions even if they don’t have enough funds. However, this feature typically has to be enabled in advance and may have a fee.

What is a credit card authorization form?

A credit card authorization form is a document businesses use to get customer permission to charge their card. This form is typically used when the card is not present (such as for payments over the phone or via email) or recurring charges. It helps businesses get the necessary information to process the payment securely.

Credit card authorization forms can be paper or electronic. Let’s look at their main characteristics:

  • Paper authorization forms. These forms are physical documents customers have to fill out to authorize a transaction. Customers typically have to provide various payment information, such as their card number, type, and expiration date. These forms also have fields for information like customer name, address, contact details, and signature to authorize the transaction. Paper forms are common in making non-digital purchases, such as telephone orders, mail orders, or in-person transactions without card readers.
  • Electronic authorization forms. Electronic authorization forms are more common these days, especially for businesses with an online presence. These forms need to be filled out digitally on online platforms, websites, and mobile apps. While businesses can create their own digital authorization forms, they often use specialist third-party providers like DocuSign. Electronic authorization forms are integral to e-commerce transactions, online payments, and auto-recurring charges.

Credit card authorization forms and security

Before completing a card authorization form, make sure you’re aware of the security risks of sharing your information this way. Both physical and digital forms have disadvantages relating to security, so it’s crucial to be mindful of them.

The key aspect to consider is who is asking you to complete this form. Is the business legitimate, and will it keep your sensitive information private? Does it use the best security measures to guard against someone stealing your data and using it to their advantage? If someone gets hold of your payment information, completing credit card transactions becomes easy. That’s why card authorization form security is so important.

Physical credit authorization forms have many security issues:

  • They may get lost, stolen, or mishandled by employees.
  • Having to type data manually may lead to errors and financial discrepancies.
  • Physical forms are not encrypted, meaning anyone can read and understand the information.

Digital forms are typically safer, especially if they’re handled by a trusted third-party provider. However, they may still pose cybersecurity risks if:

  • Someone hacks into the provider’s database and accesses your information.
  • If the company doesn’t follow the best security practices and procedures.
  • If someone steals your device and uses the pre-saved details for online payments.

It’s worth mentioning that new technologies like 3D Secure (3DS) play a key role in enhancing the security of digital forms and improving online shopping safety. 3DS is a security protocol designed to make online credit and debit card transactions safer by asking the customer to approve every transaction with two-step authentication. As 3DS and similar technologies evolve, digital forms will likely become a much safer option than paper forms.

The role of cybersecurity in credit card authorizations

Cybersecurity plays a crucial role in securing financial transactions. Without the ongoing advancement of cybersecurity technology, keeping customers safe and detecting fraud would be incredibly challenging. Let’s look at how cybersecurity and payment authorizations are interconnected.

Detecting fraudulent transactions

Cybersecurity and payment fraud prevention go hand in hand. The continuous advancement of digital security measures has significantly improved the accuracy, efficiency, and effectiveness of payment authorizations. Companies use a range of cybersecurity measures (e.g., fraud detection algorithms, machine learning, and behavioral analysis techniques) to identify and block suspicious transactions. These measures are essential in helping companies avoid substantial financial losses and empowering customers to detect fraud sooner.

Protecting customer data

Many online businesses offer to store customer payment details for future purchases. While convenient, storing credit card details online comes with various risks. That’s where strict cybersecurity measures help merchants ensure their customer payment information is safe and secure.

Additionally, businesses must comply with various cybersecurity regulations, such as the Payment Card Industry Data Security Standard (PCI DSS), created to secure payment card transactions. PCI DSS and similar requirements help companies process card payments, protect sensitive information, and prevent data breaches.

Finally, most reputable financial institutions use strong encryption techniques (like SSL) to protect data in transit, making it difficult for hackers to intercept and misuse it.

User account security

Merchants and banks also implement digital security measures to keep customer accounts safe. Cybersecurity measures like multi-factor authentication (MFA), one-time passwords (OTPs), strong password policies, and email verification help ensure customer accounts are only accessible to them. Without these protective technologies, launching attacks and hacking into customer accounts wouldn’t be as complicated.

Preventing various cyberattacks

Hackers use various techniques to exploit online payment processes for financial gain. Whether it’s a BIN attack (i.e., attempting to guess the numbers of your credit card) or using a credit card skimmer to steal your information at a supermarket, both online and offline transactions are at risk.

That’s where payment authorizations work together with cybersecurity technologies to enhance your security. The methods mentioned above — two-factor authentication, encryption, email verification, and one-time passwords (OTPs) — help protect your accounts, even if someone manages to guess or steal your credit card information.