In credit card processing, authorization is the term that refers to the request being made to charge a customer’s credit card. It is important to note that authorization does not actually charge the customer at that point in the sale process, but it is the request before funds are captured.
Authorization is the first step in the process of using merchant accounts to collect payment from a customer when they are paying with a credit or debit card. Once the card is swiped at the terminal, the authorization request is sent to a payment gateway. The payment gateway for a retailer may or may not be affiliated with their specific merchant accounts since often a third-party gateway is used.
The authorization request can arrive at the gateway in two different ways: it can come from terminal or virtual terminal at the retailer’s point of sale station or it can come from a virtual shopping cart application attached to a retailer’s website. Once the authorization enters the payment gateway, it is sent to the card issuing bank to be determined whether the payment can be accepted by the retailer’s merchant account or it is denied based on insufficient funds or other account issues with the customer’s credit card.
The authorization process is also where a merchant will pay their first fee. The authorization fee is charged to send the information to the issuing bank and receive an answer on whether the specific amount of funds are available. Whether or not the request is accepted or denied by the issuing bank, the merchant account will still be charged the authorization request fee. If the charge to the customer’s card is approved, the merchant account will be charged the transaction fee for the transaction going through. These are just two types of fees is a wide range of possible fees that a merchant account will incur for using a merchant account service.
Since authorization is the first step in credit card processing, it is important to understand its place within the payment system and how it works for both merchant accounts and the customers.