Authorization and Authorization Code

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Credit cards are the main method consumers use to pay for goods and services when engaged in e-commerce transactions. In general, businesses and consumers obtain credit cards by applying for varying lines of credit from one of the many card-issuing banks located throughout the world. Although the process of using a credit card may appear to be simple to an end-user, many steps are actually involved when a transaction takes place. These steps involve several different entities including merchants, the acquiring banks that handle credit card transactions for them, acquiring processors, card-issuing banks, and card-holders.

Authorization is the process by which card-issuing banks ultimately verify to merchants that cardholders have enough credit to cover purchases. This process often is handled by acquiring processors, which act on behalf of merchants' acquiring banks. Authorization is a very important step in a credit-card transaction because it determines whether or not a purchase will be allowed. If a cardholder's attempt to use their credit card is denied because of insufficient credit or any other reason, the acquiring processor returns a denial code to the merchant. If the credit card usage is allowed, the merchant receives an authorization code. These codes correspond specifically to each transaction. Authorization codes cause card-issuing banks to hold funds (which are immediately deducted from the cardholder's credit limit) until they are actually received at a later time (usually the end of the business day) by the merchant.


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SEE ALSO: Acquiring Bank; Card-Issuing Bank; Merchant Model; Transaction Issues