Ultimate Guide to Credit Card Payment Authorization

Introduction

When your business accepts credit card payments, it is crucial to ensure your clients have sufficient funds. Payment authorizations provide this assurance by obtaining approval directly from the card issuer or bank.

With payment authorization, you quickly secure permission from the customer’s bank to accept the payment and reserve the sale amount in their account. This guarantees that you will receive payment.

Let’s explore the credit card authorization process more thoroughly and understand what happens when you accept payments via credit or debit card.

What Is Credit Card Authorization?

Credit card authorization refers to the verification process where a merchant checks with the card issuer to confirm a cardholder has sufficient funds for a transaction. This process ensures the transaction’s legitimacy and that funds can be transferred securely before completing the purchase.

During authorization, the card issuer verifies the customer’s account balance and temporarily sets aside the transaction amount. This ensures the money is earmarked for the merchant until the transaction is finalized. If the customer lacks sufficient funds, the transaction will not go through.

Card authorization goes beyond checking if a cardholder has enough funds for a purchase. It serves as a crucial security measure, allowing card issuers and businesses to detect and prevent potential fraud before transactions are completed. For business owners, understanding how card authorization works and why authorizations can fail is essential. This knowledge helps set up efficient business processes and ensures customers have seamless transaction experiences.

The Significance of Payment Authorization

Let’s explore why payment authorization is crucial by examining its many advantages:

1. Prevents Fraud: Payment authorization verifies if customers have sufficient funds, reducing the risk of fraudulent transactions.
2. Ensures Payment: It guarantees businesses receive payment for goods or services sold, enhancing financial security.
3. Smooth Transactions: By confirming funds upfront, it minimizes transaction failures due to insufficient funds, ensuring seamless customer experiences.
4. Legal Compliance: Helps businesses comply with financial regulations and card issuer policies, maintaining trust and legitimacy.
5. Reduces Chargebacks: Authorization reduces instances where customers dispute charges, lowering administrative burdens and potential losses.
6.  Improves Cash Flow: By securing funds promptly, businesses can manage cash flow effectively, aiding in operational stability.
7. Enhances Customer Confidence: Customers feel secure knowing their transactions are authorized, fostering trust and loyalty.
8. Supports Growth: Reliable payment authorization systems support business expansion by facilitating efficient financial operations.

How Does Credit Card Authorization Work?

Let us understand the 3 Step process of card authorization 

Step 1: The customer initiates payment by using their credit card at checkout.

This could involve inserting, swiping, or tapping their card on a payment terminal, or entering their card details on a website or over the phone with a sales agent.

Step 2: An authorization request is sent to the bank. The customer’s credit card information is transmitted through an authorization switch managed by the system handling your POS device, sales support, or online ordering. The authorization switch identifies the financial institution associated with the card and sends a request to the issuing bank or acquirer for verification.

Step 3: The request is either approved or declined. Upon verifying the customer’s credit status and available credit limit, the issuing bank sends an authorization message to your payment terminal. Merchants can then place an authorization hold on the cardholder’s account for the approved amount, facilitating immediate completion of the sale.

How Transaction Fees Impact Payment Authorization

Transaction fees are incurred each time a transaction is authorized. They vary and should be considered in your sales calculations.

Pending transactions indicate authorized but not yet posted charges, typically clearing within a few business days. 

Differences between authorized and final transaction amounts may occur temporarily, such as with initial authorizations at car rentals or hotels, which are adjusted upon finalization of charges.

What Is a Credit Card Authorization Form?

A credit card authorization form is a document that customers fill out to give businesses permission to charge their credit cards. These forms are typically used for larger purchases like vehicles and electronics. They are also commonly used when starting new subscriptions or recurring payments. 

Credit card authorization forms can be either digital or printed. Businesses use them when they need to charge a card later without the cardholder being present.

The essential information needed on such a form includes details like the cardholder’s name, card number, card network (like Visa or Mastercard), card expiry date, billing postcode, business name, a statement permitting charges, and the cardholder’s signature along with the date it was signed.

What Happens If Payment Authorization Gets Declined?

During payment approvals, banks or credit issuers may flag credit cards as lost, stolen, expired, or frozen or identify transactions as suspicious, leading to rejection and scrutiny for unusual charges. Technical issues, like setup errors or submission mistakes, can also block transactions with generated error codes.

When payment authorization fails, sellers should delay finalizing transactions until approval is secured. Similarly, online businesses should hold off on shipping products until payment issues are resolved. Sellers typically handle technical problems, though buyers may need to address issues with their cards or devices.

Online credit card transactions have a lower approval rate of about 10% versus in-person due to higher fraud risks. Banks apply stricter checks, which can frustrate customers experiencing declined transactions. 

eCommerce businesses using Payment APIs can retain customers by suggesting alternative payments or verifying card details to rectify errors, fostering repeat business.

How to Improve Payment Authorization Charges?

Improving payment authorization rates for credit cards involves several strategies to reduce declines and ensure smoother transactions. Here are some effective methods to enhance authorization rates:

1. Optimize Data Accuracy: Ensure that all customer information entered during checkout is accurate, including billing address, CVV, and card details. Mistakes or inconsistencies can trigger declines.
2. Use Address Verification Service (AVS): AVS helps verify the cardholder’s billing address provided during the transaction. Using AVS can reduce fraud and improve authorization rates.
3. Implement Card Verification Value (CVV):Customers should be required to enter the CVV code from the back of their credit card.This additional security measure helps authenticate transactions and reduces fraud risk.
4. Update Fraud Detection Tools: Use advanced fraud detection tools and algorithms to identify and prevent fraudulent transactions without unnecessarily declining legitimate ones. These tools analyze transaction patterns and behaviors in real time.
5. Monitor and Analyze Declines: Regularly review and analyze decline reasons to identify common issues. This helps pinpoint specific problems and adjust strategies accordingly.
6. Reduce Transaction Timeouts: Ensure that transactions are processed swiftly to avoid timeouts, which can lead to declines. Optimize your payment processing infrastructure to handle transactions efficiently.
7. Work with Reliable Payment Processors: Choose reputable payment processors known for high authorization rates and reliability. Some processors specialize in optimizing authorization rates for various types of transactions.
8. Offer Alternative Payment Methods: Provide customers with alternative payment methods such as digital wallets (e.g., PayPal, Apple Pay) or direct bank transfers. This allows customers to choose a method with higher authorization success rates for their situation.
9. Educate Customers: Provide clear instructions during checkout regarding how to enter payment information correctly and what to do if a transaction is declined. This can reduce errors and improve success rates.
10. Maintain Good Customer Communication: If a transaction is declined, promptly inform the customer and provide guidance on how to resolve the issue, such as updating information or choosing a different payment method.

By implementing these strategies, businesses can optimize their payment authorization processes, reduce declined transactions, and ultimately improve customer satisfaction and retention.

About HighRadius: B2B Payments Suite

HighRadius offers a comprehensive, cloud-based solution to automate and streamline the B2B payments process for businesses. The B2B Payments Suite features a robust payments module with a payment gateway, surcharge management, and interchange fee optimization. The payment gateway for SAP integrates with SAP and makes cash applications seamless.

Trusted by 1000+ companies to deliver speed-to-value, including like P&G, Ferrero,Johnson & Johnson, and Danone, HighRadius has been a Gartner Magic Quadrant Leader 3 years in a row, placed highest in the ability to execute and furthest in the completeness of vision. 

FAQs

1) What does purchase authorization mean?

Purchase authorization refers to the process of getting approval from a bank or credit card issuer to complete a transaction. Authorization confirms that the funds are available and verifies the transaction’s legitimacy. Without authorization, the purchase cannot go through.

2) What does authorization hold mean?

Authorization hold refers to the process of temporarily reserving funds on a credit or debit card when a transaction is initiated. The hold ensures the card has enough funds for the purchase. Once the transaction is complete, the hold is released, and the actual payment is processed.

3) How does payment authorization impact transaction fees?

Payment authorization can impact transaction fees by initiating a process where fees are assessed based on the type of transaction, the involved parties (like banks or processors), and any additional services provided. Unauthorized or declined transactions may still incur certain fees.

4) How long does an authorization hold on a credit card?

An authorization hold on a credit card usually lasts from a few hours to several days. The exact duration depends on the merchant’s policies and the card issuer. After this period, the hold is automatically released, and the funds become available again for other transactions.