What Is an Authorized Transaction? How It Works and Declines

What Is an Authorized Transaction?

An authorized transaction is a debit or credit card purchase for which the merchant has received approval from the bank that issued the customer’s payment card. Authorized transactions are a component of the electronic payment process. This process involves the cardholder and numerous other entities working together to complete an electronic transaction.

Key Takeaways

  • An authorized transaction is a debit or credit card purchase that is approved by the customer's bank.
  • This process involves numerous entities working together to complete an electronic transaction.
  • A card could be declined for many reasons, including the expiration of the card, not enough funds or credit available, or because the card is counterfeit.

How an Authorized Transaction Works

Financial institutions, merchants, and payment processors are all part of the infrastructure that makes electronic payments possible. The first step in an electronic payment begins with the cardholder seeking payment with a payment card. The cardholder authorizes the payment by providing it to a merchant and presenting identification if requested. After a consumer swipes his or her card through a card reader or enters the card’s details in an online merchant’s checkout system, the payment system sends the card’s details to the merchant’s bank (also called the acquiring bank).

Usually, a payment card will require additional information to begin processing, such as a personal identification number, expiration date, zip code, or card security code.

Once card information has been entered, it is sent to the merchant bank, which is the lead facilitator on an electronic transaction. The merchant bank works on behalf of the merchant to obtain payment deposited in the merchant’s account. Once the merchant bank receives the payment information, they utilize their payment network to send the payment communication through the appropriate channel.

Processing an Authorized Transaction

Most merchant banks will work with a processor network, allowing the merchant to accept various branded cards. The payment processor contacts the cardholder’s financial institution, also called the issuing bank. The issuing bank ensures that the cardholder has the funds in their account to cover the charge. They may also have certain checks in place to help prevent fraudulent charges. Approval from the issuing bank is an important step in authorizing the transaction. Once the issuing bank approves the charge, the processor sends the communication to the merchant bank who confirms the merchant's charge.

The merchant bank is the final entity involved in the transaction. They communicate the authorization to the merchant. They are also considered the settlement bank. Once the transaction has been confirmed to the merchant, it is considered authorized, and the merchant bank will take steps to deposit the funds in the merchant’s account.

Declined Transactions

If a transaction cannot be authorized, it will be declined. A card could be declined for many reasons, including the following:

  1. The cardholder does not have sufficient funds in their account to cover the transaction, or the requested transaction would cause the cardholder to exceed the card’s credit limit.
  2. The card has been reported lost or stolen.
  3. The card is counterfeit.
  4. The card has expired.
  5. There has been a technical glitch.
  6. The cardholder made a mistake when entering credit card details.
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