In the payments industry, the authorization amount refers to the maximum amount approved by the card issuer or payment network for a particular transaction. It represents the maximum value of the transaction that the merchant can request authorization for. The authorization amount is typically determined based on the available credit limit or funds in the cardholder’s account.
Here’s how the authorization amount works in the payments industry:
- Merchant initiates authorization: When a customer makes a purchase, the merchant’s payment system sends an authorization request to the card issuer or payment network to verify the availability of funds and obtain approval for the transaction. The authorization request includes details such as the transaction amount, merchant identification, and cardholder information.
- Card issuer or payment network verification: The card issuer or payment network receives the authorization request and performs various checks to determine if the transaction can be approved. These checks include verifying the cardholder’s account status, available credit or funds, and any restrictions or risk factors associated with the transaction.
- Authorization decision: Based on the information received, the card issuer or payment network makes an authorization decision. This decision can fall into one of the following categories:
- Approved: If the available funds or credit limit is sufficient, and there are no other issues, the transaction is approved. The card issuer sets aside the authorized amount, reducing the available credit or earmarking the funds for the transaction.
- Declined: If the cardholder’s account does not have sufficient funds, exceeds the credit limit, or if there are other security concerns, the authorization is declined. The transaction cannot proceed, and the cardholder is notified of the declined transaction.
- Partial approval: In some cases, the available credit or funds may not cover the full transaction amount. In such instances, the authorization may be partially approved, and the cardholder may be required to provide an alternate payment method for the remaining balance.
- Settlement and capture: After the authorization is obtained, the merchant proceeds with the transaction, which involves capturing the funds or initiating the settlement process. The captured amount should not exceed the authorized amount. The settlement process involves transferring the authorized funds from the cardholder’s account to the merchant’s account.
It’s important to note that the authorization amount is not the same as the final transaction amount. In certain cases, the final transaction amount may be different from the authorized amount due to factors such as tip adjustments, additional charges, or changes to the order. However, the merchant must ensure that the captured amount does not exceed the initially authorized amount to avoid potential issues or disputes.
The authorization amount plays a crucial role in ensuring that cardholders have sufficient funds or credit available to cover their purchases. It helps protect both the cardholder and the merchant from transactions that may exceed the cardholder’s financial capacity.