How It Works: Credit Card Authorization


Ever wondered about the details of the credit card transaction process. If you are a consumer, you depend on these payment methods to make purchases. If you are a merchant, you depend on the process to accept payments for services or products, and not only that, you pay to process those transactions. Shouldn’t you know where your money is going? 

Although it happens almost instantaneously, there’s a lot going on behind the scenes and multiple players involved to complete a transaction. Today we’ll look at the authorization process from the customer’s prospective. After all, we’re all consumers. 

Here’s a simple example. Say you want to buy a pair of shoes, you walk into your favorite store and find exactly what you want. As you know there are several ways to pay, but who carries cash or checks anymore. Am I right? Enter the trusty credit or debit card. Think about your card for a second. There are 2 important players in the process listed right on the front of it, the credit card network, such as Visa or MasterCard, and the bank who issued you the card. We’ll talk about both of them a little later.

So you present your credit card owner to the shop owner for payment, you are asked to swipe your card. If you have an EMV card, commonly known as the chip, the appropriate terminology is to “dip” your card. I love that they were able to work chips and dip into credit card processing terminology. What happens next, just like in life and relationships, is all about communication.

The first line of communication is with an acquirer. An acquirer charges a fee to the merchant for handling the transaction and collects fees for the credit card network and issuing bank. Frequently, the acquirer is invisible to the merchant as they work with an ISO, an independent sales organization, who partners with acquirers to provide service, equipment, and processing to merchants.

When the card is swiped at the terminal the acquirer passes the request for funds on to the credit card network. They, in turn, pass it along to the issuing bank, or issuer. The issuing bank then checks to see if you actually have funds available to purchase the shoes. If so, the authorization is sent back through the credit card network and on to the acquirer who pushes the approval to the merchant’s terminal.

Voila, APPROVED. 

Knowing the process is helpful as a consumer, but it’s a necessity to someone running a business. Remember those fees I mentioned? Unfortunately, you could be paying hidden fees each month if you’re not careful. If you want to avoid these unwanted costs, make sure you are working with a trustworthy partner that provides transparent billing statements. They should be willing and able to educate you on what you’re being charged. Take my advice, it’s beneficial for you to know how it works.

 

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