What is a credit card authorisation and why is it important?

If you have started using a credit card recently, you may have faced a situation wherein a merchant tried to authorise your card to verify whether it has sufficient funds or not. This process is referred to as credit card authorisation.

It is a temporary hold placed on a certain amount of a customer’s credit card to confirm that they have sufficient funds or credit available to complete a purchase. This enables the merchant to verify that the card is valid and that the transaction will be approved when the final sale is processed.

This process is imperative for both merchants as well as consumers, thus ensuring a safe and secure transaction between the two parties.

How does it work?

Merchant request: The merchant submits a request to the card issuer through a payment processor.  

Issuer Verification: The issuer checks the cardholder's account balance, credit limit, and any fraud alerts

Sending the code: Following this, the card issuer (i.e., bank) sends an authorisation code to the merchant.  

Transaction gets complete: Finally, the merchant can process the transaction, once s/he is satisfied.

Credit card authorisation is vital for these reasons:

Verification of funds: The card authorisation ensures that the cardholder has enough credit available to complete the transaction, which helps reduce declined transactions at checkout.

Guaranteed payment: Thanks to an authorisation hold, merchants are assured that they will be paid, as it reserves the funds for the transaction until the sale is completed or cancelled. This is crucial for industries like hotels and car rentals, where services are provided before payment is finalised.

Temporary holds: In some businesses, such as car rentals or hotels, an authorisation allows merchants to place a temporary hold to cover potential additional charges (e.g., damage fees or room service) that may be added to the final bill. This hold is usually released when the final bill is settled.

Customer experience: Having a pre-authorization process can help customers avoid overdrafts or unexpected charges, as they’ll be alerted if they don’t have sufficient funds during the authorization process.

Fraud prevention: By verifying the card information and placing an authorization hold, merchants can help reduce the risk of fraudulent transactions, as they can confirm the cardholder’s identity and card details.

To sum up, credit card authorisation is vital to help protect both merchants and customers, ensuring that transactions are valid, secure, and completed smoothly.