How does the credit card payment authorization process work?
Payment processing involves a number stages, including credit card payment authorization, capture and settlement. The first stage, authorization, occurs following the credit card payment. In this stage, the issuing bank (the customer’s credit card issuer) authorizes the transaction and allocates funds for it. At this point, the amount “paid” is deducted from the buyer’s credit limit, and the amount of available funds the credit card holder has at his disposal is decreased.
However, the removal of funds from the buyer’s account can take place up to thirty days later depending on the particular card issuer’s policy. The stage at which the buyer’s account is actually debited is referred to as the capture, which occurs following the payment authorization. The settlement phase occurs next. This is when the amount paid is actually transferred to the merchant account.
For industries like travel or hotels, which are considered “high risk,” it is common to have an authorization hold where no money is debited, but the credit amount is reduced. When a transaction is cancelled during the authorization period, it is considered voiding a payment, because no debiting occurred.
If the cancellation occurs after the capture – i.e., once the transaction amount has been debited – a refund takes place, meaning the funds deducted from the account are returned. Refunds can occur instantaneously or after an extended period of time depending on the policies of the payment provider.