How Credit Card Authorization Works?

• 15 May 2017 | 1143 Views | By Mint2Save

There is no existence to the idea of digital and plastic payments, unless a system of identity verification is there.  Thanks to increasing speed of global connectivity, increasing security measures and awareness among consumers, we are able to carry out these transactions in quick time.

Credit card is the only revolving credit system that requires no collateral and, is solely based on one’s profession, income and credit score. Such a risky loan product deserves a highly secure system to enable transaction and prevent anything “phishy” or fraudulent.

In this article, we are going to share knowledge about credit card authorization and how it helps the merchant, customer as well as the credit card company.

The authorization process for the credit card is necessary to check whether the credit card holder’s has enough funds and is able to make purchases from a merchant or not.

It is also needed to make sure whether the merchant’s machine is capable enough to accept that credit card or not. For instance, we have a lot of merchants accepting Visa and MasterCard based credit cards, but when it comes to American Express or Diners, only a few merchants have machines that can accept those.

The authorization process request begins whenever card holder makes a purchase or product or service via credit or debit card.  The authorization process of credit card is also important as it helps to lessen frauds, processing costs and improve satisfaction among the customers.

The basic players under Credit card authorization are:

Merchant: Any business that maintains merchant account, which allows them to accept the credit or debit cards as payments from customers for sale of goods and services.

Card holder: A person holding credit or debit card issued by the bank.

Acquiring Bank: A registered member of the card association, i.e, Visa or MasterCard. These banks provide merchants equipments and software to accept cards, customer service, promotional activities and other aspects.  

Card associations: They just act as a clearing house or custodian between the issuer of the credit card and merchant accounts.

Issuing bank: Issuing bank issues the credit card to the consumers.

How does Credit Card Authorization work?

The process of authorization can be understood easily in these three steps:

1. Authorization:

Authorization process is necessary as it will make a confirmation that whether the customer card has enough balance to make a purchase of goods and services or not. It also ensures that a card is valid or invalid

• The customer or the card holder enters the credit card information in order to make a purchase. Then the merchant submits the request of the purchase to the acquirer.
• Then to authorize the transaction, the merchant sends that request to the issuer. The issuer will either approve or decline the transaction and that reply is sent to the bank.
• If a card is approved, then authorization code is sent to the acquirer by the issuer, and acquirer receives the transaction and authorize it. The card holder receives the product and authorization process is completed.

2. Batching or Settlement

The settlement process is done to clear and manage the electronic payment transaction.

• When a card holder submits the transaction via Visa, MasterCard or appropriate payment method, then merchants sends that request to the issuing bank of the card holder.
• The bank receives the settlement request and does two things: issues the credit to chase so we can reimburse you for the amount of settled transaction, or issues a debit to the issuer so as to charge them for that transaction.
• Issuer post the transaction to the card holder’s a/c And card holder receives his/her statement and pays the bill.

3. Funding:

The funding process is done when the merchant receives payment minus interchange and discount fees.

Why a Credit Card?

Many people ask why it is important to have a credit card. At times when you want to purchase something that is out of your budget at the moment you can opt to carry the transaction through with your credit card and make the payments in installments. There are multiple of the benefits of having a credit card apart from its convenience of making payments for shopping; it is safer to carry than cash. To better understand the importance of credit card here is some different benefits:

1. Travel Discounts
   A lot of credit card companies have accorded with several hotels, car rental companies, and shopping malls which offer you some great deals, so that you go for the card with the maximum discount stores and earn reward points.
2. Travel Insurance Cover
   Also, lots of credit cards come along with a travel insurance cover. So whenever you are travelling abroad, travelling overseas require a mandatory insurance cover, though, having a credit card saves a lot of time.
3. Reward Points
   Many cards offer membership rewards program, in which some cards charge fees and some are free, so, you must be aware of these and must judge it properly. Although, credit cards with the fees offer better reward points. When you start using your card you begin to accumulate reward points for every pay, then you can cash those points for attractive gifts at partner stores or cash discounts.
4. Cash Back: 

If you sign up for the right credit card, then you can earn cash back on your purchases. Many credit cards offer striking cash back incentives each time when you use your credit card.

Further, a lot of companies offer easy instalments when the EMI on credit card goes beyond the repaying capacity of the holder. 
So, because of such benefits, use of credit card is very important and due to the demonetization of Rs.500 and Rs.1000 notes, the use of credit card has been increased a lot.

Lately, we have also seen major online retailers promoting the use of credit cards in purchasing good and expensive electronic items. With the process of authorization already at work, we can expect easy services to customers, provided they too abide by the rules set by credit card issuing companies.