What is Authorization?

When a cardholder and a merchant enter into a card transaction (the exchange of goods or service for a card based payment), the merchant usually sends an online authorization request to its acquirer.

The purpose of authorization is to shift financial liability from the merchant to the acquirer and finally to the card issuer in the event of a problem with the transaction. Authorization provides some protection for a merchant that wishes to avoid chargeback fees as a result of disputed transactions and also to the acquirer that has an interest in the merchant’s credit worthiness.

If the acquirer chooses to send the request from the merchant online to the card issuer, the card issuer confirms that the number on the card exists and is valid, the card has not been reported lost or stolen at the time of the transaction, and sufficient funds are available to cover the transaction amount. The authorization request may be 'declined' (refused) or 'referred' (more information is required) by the card issuer. In the event of a referred response, the merchant may decide to contact the card issuer and then process a transaction to request authorization with the authorization code obtained (voice authorization).

Although online authorization is commonplace now because of the speed and reliability of data communications, a merchant and its acquirer may agree not to authorize all transactions online (offline authorization). The floor limit is a monetary amount above which a transaction must be authorized online.

Because a merchant wants to receive payment as soon as the request for goods or service has been fulfilled, authorization is followed as soon as possible by a request to capture the transaction amount from the cardholder’s account.

Authorization establishes financial liability for a transaction but no money is transferred at this stage. The request to capture funds begins the settlement process. The purpose of settlement is to transfer the transaction amount from the cardholder's account to the merchant's account.