IPP Europe

What is Authorization

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In the world of fintech and payment service providers, certain terms carry significant weight and importance. One such term is “authorization,” a fundamental concept in the realm of payment processing. This article aims to provide a clear and concise understanding of the term “authorization,” its significance, and its role in the payment processing ecosystem.

What is Authorization?

Authorization, in the context of payment processing, refers to the process of obtaining approval from a cardholder’s issuing bank before completing a transaction. It serves as a crucial step to ensure that the funds required for a purchase or transaction are available and that the cardholder is indeed the legitimate owner of the card. Essentially, authorization acts as a protective measure against fraudulent activities and helps maintain the integrity of the payment system.

How Does Authorization Work?

When a customer initiates a payment using their debit or credit card, the authorization process begins. Here’s a step-by-step breakdown of how it works:

  1. Merchant Initiates Request: The merchant’s payment system sends a request for authorization to the acquiring bank. The acquiring bank is the financial institution that processes transactions on behalf of the merchant.

  2. Acquiring Bank Contacts Issuing Bank: The acquiring bank forwards the authorization request to the issuing bank (the bank that issued the card to the customer).

  3. Issuing Bank Validates Funds: The issuing bank checks the customer’s account to ensure there are sufficient funds to cover the transaction. If the funds are available, the issuing bank approves the authorization request. If not, the request is declined.

  4. Issuing Bank Checks Security: Apart from fund availability, the issuing bank also evaluates the transaction for security purposes. If the transaction seems suspicious or potentially fraudulent, the bank might decline the authorization.

  5. Response to Merchant: The issuing bank’s decision—approval or decline—is sent back to the acquiring bank. The acquiring bank then informs the merchant of the outcome.

  6. Merchant Proceeds or Declines: Based on the response from the acquiring bank, the merchant either completes the transaction or informs the customer that the payment has been declined.

Significance of Authorization

The authorization process holds several key benefits within the payment processing landscape:

  1. Fraud Prevention: By verifying the availability of funds and assessing the legitimacy of the transaction, authorization serves as a crucial defense against fraudulent activities. It helps protect both merchants and customers from unauthorized transactions.

  2. Customer Trust: When customers observe that their transactions are subject to a thorough authorization process, they feel more confident about the security of their financial information. This, in turn, fosters trust in the payment system.

  3. Payment Guarantee: For merchants, receiving an authorization approval ensures a higher likelihood that the payment will be successful. It reduces the risk of chargebacks due to insufficient funds or unauthorized transactions.

  4. Efficient Fund Management: Authorization prevents customers from spending beyond their available balance, contributing to better fund management and financial responsibility.