What is 'Credit Card Authentication'

Credit card authentication is the process of confirming a customer’s credit card with the issuing entity. Credit card authentication generally refers to the first half of the transaction communication process which involves transmitting the card information to the issuer through the payment processor for authentication.

BREAKING DOWN 'Credit Card Authentication'

Credit card authentication and credit card authorization are the two main processes that complete a credit card’s transaction communication for payment. In an electronic payment transaction four entities are generally involved: the merchant, merchant acquiring bank, network processor and issuer. The issuer provides approval of the card transaction for authentication. Once authenticated the merchant acquiring bank receives the communication from the network processor and authorizes the transaction for payment acceptance and account deposit.

Authentication Communication

When a card is swiped or entered electronically the details of the transaction are sent to a merchant acquiring banks which facilitates the transaction processing. All merchants who accept electronic payment cards must work with a merchant acquiring bank which facilitates transaction communications and settles the funds for deposit. The merchant acquiring bank first transmits transaction details to the issuer through the network processor for the authentication.

The issuer checks various card details such as card number, card type, card security code and cardholder billing address to ensure accuracy. Issuers also have various procedures in place to ensure that a transaction is not fraudulent in order to protect the security of the cardholder. The authentication process also helps to prevent chargebacks and protect the merchant from any funding issues.

Authorization Communication

Authorization communication is the final step in a credit card transaction process. Once a card has been authenticated, the issuer sends the authentication to the merchant acquiring bank through the network processor. The merchant acquiring bank receives the communication and authorizes the payment for the merchant. If a payment is not authenticated the merchant acquiring bank will decline the transaction. While extensive communication is required for the completion of a transaction, transaction processing is usually completed in a matter of seconds due to the capabilities of modern technology.

The final authorization process also allows the merchant bank to initiate a payment deposit in the merchant’s account. Thus merchants rely on merchant acquiring banks for both payment processing and account servicing. In a credit card transaction, the merchant acquiring bank is also the settlement bank, receiving the payment funds and depositing them in the merchant account.

Merchant acquiring banks typically charge merchants both transaction fees and monthly account fees. Transactions fees compensate the merchant bank for facilitating the communication. Merchant acquiring banks also cover the risks of any issues arising with non-settlement, chargebacks and refunds which generates the need for monthly account fees.

  1. Authorized Transaction

    An authorized transaction is a debit or credit card purchase ...
  2. Merchant Agreement

    A merchant agreement is a contract governing the entire relationship ...
  3. Merchant Discount Rate

    The merchant discount rate is the rate charged to a merchant ...
  4. Personal Identification Number ...

    A personal identification number (PIN) is a numerical code used ...
  5. Authorization Date

    The month, day and year when a credit card transaction is approved ...
  6. Settlement Bank

    A settlement bank is the last bank to receive and report the ...
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