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.

Key Takeaways

  • 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.
  • After a credit card is swiped, the payment system sends the card’s details to the merchant’s bank, who is the lead facilitator on an electronic transaction.
  • Once the merchant bank works with the payment processor to contact the cardholder's financial institution, ensuring that the cardholder has the funds in their account to cover the charge, the authorization is complete.

Understanding Authorized Transactions

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.

Electronic Payment Transactions

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 who seeks to make a payment with a payment card. The cardholder authorizes the payment by providing it to a merchant and presenting identification if requested. After the consumer swipes their 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 some 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 who is the lead facilitator on an electronic transaction. The merchant bank works on behalf of the merchant to obtain payment that is 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.

Most merchant banks will work with a network of processors, which allows the merchant to accept a variety of different branded cards such as Visa, Mastercard, or American Express. 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 communication is sent by the processor to the merchant bank who confirms the charge to the merchant.

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.

Reasons for 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.