authorisation
Authorisation is the step in a card payment where the cardholder's bank confirms the card is valid, the funds or credit are available and the payment is approved. It places a hold on the amount. The money does not move until the payment is captured and settled.
When a card is tapped, keyed or entered online, the request goes from the business through its acquirer and the card scheme to the issuing bank, which answers in a second or two: approved, declined or referred. An approval reserves the amount on the cardholder's account. It is a promise, not a transfer. The business then captures the authorisation, immediately or later, and the scheme settles it.
Why it matters: the gap between authorisation and capture is useful. A hotel, a hire company or a trade supplier can authorise an amount at the start, hold it for days, and capture only what is owed at the end. Pre-authorisation of deposits is one of the payment products a software platform can build on top of a plain card payment. Authorisations also expire, and an authorisation captured after it has lapsed can be declined or downgraded.
What to watch: authorisation rates. The share of attempted payments that issuers approve varies by card type, by whether 3-D Secure was used and by how the request was formed. A few points of authorisation rate is often worth more to a business than a few basis points of fee, and it is one of the first things to measure when payments move from one provider to another.
Sources
- FCA, Strong customer authentication, 17 February 2023