Payment Authorization Explained: Meaning and Step-by-Step Process

When someone swipes a card, an intricate sequence of steps is instantly carried out. For the payment to go through, it must be authorized, captured, and settled. 

Payment authorization is a critical step in the transaction process. It is essentially where the issuer says that the transaction can go through. If there are insufficient funds, suspected fraud, incorrect CVVs, or other issues, the transaction will be declined. 

As a merchant, there are specific steps you can take to increase your authorization rates. From better fraud detection to tokenization, you can ensure a high level of security and frictionless transactions. 

To learn more about the payment authorization meaning and how declined transactions work, read on.

TL;DR

• Payment authorization is when the issuer decides to approve the transaction.
• During the authorization process, the issuer verifies the availability of funds and places a hold. The funds will not actually transfer until after the capture and settlement processes occur.
• Merchants can delay capture for many reasons. Subscription payments, slow shipments, or expected changes to the transaction total are common reasons for delaying capture.
• Authorization holds only last for around five to seven days, so capture must occur before this deadline passes. However, this timeline can vary between providers.
• Declined transactions may occur due to soft declines or hard declines.
• If a soft decline is involved, it means that authorization failed because of a temporary reason. For example, there may be insufficient funds or a network outage.
• A hard decline is when the transaction fails due to a permanent reason, such as the incorrect CVV or a stolen card.
• When a soft decline happens, you can often rerun the card successfully. For hard declines, you should request an alternative payment type or cancel the transaction entirely. 
• If your company experiences excessive declines, it can hurt your conversion rate and result in a poor customer experience.
• By choosing to optimize your payment routing, gateway setup, and risk controls, you can boost your authorization rate.

PayCompass can help you achieve a balance between superior fraud protection and high approval rates.

What Is Payment Authorization?

Payment authorization is essentially when the issuing bank green-lights the transaction. Basically, the issuing bank validates that the funds are present and the transaction is valid. 

While most people think of credit card transactions when they hear someone talking about authorization, the payment authorization meaning also covers direct bank deposits. However, direct bank deposits have a slightly different process that involves different risk and verification requirements.

When a customer taps their card, your point-of-sale (POS) system or payment gateway automatically sends the data to the acquiring bank (the merchant’s bank). From the acquiring bank, it is routed through the card network to the issuing bank (the customer’s bank). At this point, the issuing bank must verify that the card information is valid, that funds are available, and that the transaction is legitimate.

If everything looks good, funds in the customer’s account are placed on hold in order to cover the transaction. Then, your POS terminal or gateway shows an approval or decline code. At this point, the payment authorization process is officially complete.

How Is Payment Authorization Different From Capture and Settlement?

When talking about payment processing, you will often hear people refer to payment authorization, capture, and settlement. While these terms may sound similar, they are actually distinct stages in the payment process.

• Payment Authorization: This is the stage where the issuing bank reviews the transaction to determine if the transaction can occur. If the transaction is valid and funds are available, a hold can be placed on the individual’s account.
• Payment Capture: When a merchant submits a capture request to their payment processor, it confirms that they want to proceed with the transaction. The amount authorized during the authorization stage is now finalized. However, it’s important to note that it is also possible to have partial or delayed captures.
• Payment Settlement: Payment settlement is when the funds actually move from the issuing bank, through the card network, and to the acquiring bank. Once any fees are withdrawn, the funds are deposited in the merchant’s account.

When Does It Make Sense To Delay Capture?

After a successful payment authorization process, some merchants decide to delay the payment capture step. There are a few common reasons why you might want to do this.

You Want To Make Adjustments

Sometimes, merchants want the added flexibility of having delayed captures. If a payment has already been captured and settled, the merchant would have to issue a refund in order to adjust the payment total. Instead of needing refunds, merchants can delay capture. Once they have made any necessary adjustments, the payment process can proceed with the correct total.

You Are Concerned About Fraud

After the payment authorization is complete, you may want to run additional fraud detection checks. A brief delay gives you a chance to spot fraudulent transactions before they become an issue.

You Need To Check Your Inventory

Providing refunds and dealing with chargebacks can quickly get expensive. If you have a lot of fast-moving inventory, you may want to delay capture so that you can verify that the inventory is on hand.

You Plan on Sending the Order Later

If you are waiting for a part to arrive or the purchase is a pre-order, you may want to delay capture so that you can avoid potential refunds.

You Operate a Subscription Business

Often, subscription-based companies offer free trials so that customers can test out their products or services. During this free trial, the business uses delayed capture to verify that the subscription payment is available. However, the actual payment won’t be captured and settled until after the free trial ends.

1. What Does an Authorization Hold Mean for Merchants?

When there is an authorization hold, it means that the issuing bank has approved the transaction and the funds are now reserved. However, this amount is still in the customer’s account.

In order to get paid, payment capture also has to occur. Normally, you have around five to seven days to capture the transaction. Otherwise, the hold will be removed, and you’ll have to get the payment authorized all over again.

Holds are designed to help manage risk by showing that the funds are available, so you can prepare the customer’s order. At the same time, they have major operational limitations. While the funds are present, there is no guarantee that capture will be completed. Because of this, you should exercise caution in sending out products and services during this interim stage, especially if you deal in high-value merchandise.

A Step-by-Step Look at How Payment Authorizations Happen

So, what is payment authorization? And what does it look like in practice? To get a better understanding of how payment authorization works, let’s take a step-by-step look at the process.

• Checkout Begins: First, the customer initiates the checkout process. Once they decide on what they want to buy, they can enter their payment details into the platform or gateway.
• Payment Details Are Collected: Next, the customer’s payment data is captured. Often, this data is tokenized as an added security measure.
• The Merchant Sends an Authorization Request: The merchant’s system creates, packages, and sends an authorization request to the payment gateway. This request includes the merchant ID, currency, payment amount, and other important information.
• The Payment Gateway Routes the Authorization Request: The payment gateway encrypts the data and sends it to the payment processor. 
• The Payment Processor Routes the Transaction: Next, the processor relays the information to the card network.
• The Card Network Sends the Request to the Issuing Bank: Then, the card network sends the data to the issuing bank. Before the issuing bank approves the transaction, they ensure that funds are available.
• The Funds Are Placed on Hold: If funds are available, the transaction approval is sent to the merchant. The transaction amount is reserved for the merchant.

Retries Can Be Attempted: Sometimes, payments are declined because of incorrect information. If this happens, the customer can retry the transaction again.

What Happens When an Authorization Is Declined?

A card decline is when the issuer chooses not to authorize the transaction. When this occurs, the decline response is sent through the payment network, processor, and gateway. Funds are not reserved, so the transaction cannot go through.

When this happens, the merchant can tell the customer that the transaction has been declined. Alternatively, they can try to run the payment again. The right option will depend on the type of decline involved. 

How Hard Declines Work

A declined transaction can involve a soft decline or a hard decline. Hard declines generally mean that there is something permanently wrong. For example, they may occur because of the following reasons.

• The card was reported lost or stolen.
• The CVV or card number is wrong.
• The card has expired.
• The account is blocked.

If you retry a hard decline, it will likely fail. To continue with the transaction, you’ll need to ask for a different payment type. If this isn’t an option, the customer can also try to call their bank to sort everything out.

How Soft Declines Work

A soft decline occurs for a temporary reason, and it is often fixable. For example, soft declines often happen because of the following issues.

• There are insufficient funds available in the account.
• The network or issuer is experiencing an outage.
• There were too many payments submitted in a short time period.
• Additional authentication is required.

When a soft decline is involved, you can often run the transaction again and receive an approval. However, the customer may need to provide additional verification and authentication.

How PayCompass Helps Merchants Improve Their Authorization Outcomes

Companies can improve their authorization rates by adopting a multi-acquirer approach, fallbacks, tokenization, and 3DS authentication. Network tokenization, which involves converting payment cards into digital tokens, can also increase authorization rates. Even if the underlying payment card has expired, the tokenized payment will often go through. Meanwhile, fallback options provide an alternative way to process failed transactions, ensuring you don’t miss out on potential revenue.

Adopting fallbacks and better authentication measures are effective tools, but they can be challenging for merchants to set up. By partnering with an experienced payment processor, you can get help choosing and implementing these techniques. 

At PayCompass, we can boost your authorization outcomes by helping you choose the right gateway setup, payment routing, and risk controls. Through our team of experts, you can adopt intelligent routing and reduce your rate of declined transactions. Our fraud rules balance security with convenience, ensuring fraudulent transactions are caught and legitimate transactions occur frictionlessly. Whether you need support for soft decline recovery or better visibility into your authorization rate, we can help with all aspects of your payment operations.

Final Thoughts

So, what is payment authorization? And how can a better authorization rate improve your company’s revenue stream?

Although the payment authorization process is often hidden behind the scenes, it is an essential part of each transaction. As a merchant, there are certain measures you can take to increase your authorization rate. By avoiding soft and hard declines, you can prevent customer abandonment and protect your revenue stream.

While retrying the transaction may work for soft declines, it isn’t an option in every case. Through intelligent routing and the right payment gateway setup, you can reduce the likelihood of network and routing-related issues. 

If you are struggling with your payment authorization rate, we can help. Reach out to PayCompass today to learn more about the best payment setup for your business.