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What Is an Authorization Code?

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  • Written By: Eugene P.
  • Edited By: Angela B.
  • Last Modified Date: 15 September 2016
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An authorization code is a number generated by a bank or financial institution that indicates a successful transfer of funds from an account through a specifically authorized person. The term is often used in conjunction with credit cards, indicating a credit card processor or issuing bank has approved a credit or funds transfer the cardholder wishes to make. It also can be used in a more broad sense to talk about how authorized people use a managed account in relation to making investments on behalf of the account holder.

When a person attempts to use a credit card to make a purchase, several steps are taken to resolve the transaction. The credit card number is transmitted to a credit card processing company or to the issuing bank, depending on the individual circumstances. The institution that is being queried then checks to see if there are funds available to cover the purchase. If there are sufficient funds, then an authorization code is transmitted back to the merchant, who stores it for later resolution.

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Once authorization is received, the issuing bank linked to the credit card places a preliminary authorization hold on the card, effectively reserving the funds but not yet charging the customer. At the end of the business day, or at some other point, the merchant from whom the purchase was made will resolve his or her receipts and make a formal request for a transfer of funds from the institution. It is at this point that funds are actually transferred, with the authorization code used as a kind of tracking method for the transaction.

If there are not sufficient funds at the time of purchase, then a negative authorization code will be issued. Similarly, if for some reason there is a problem with the authorization code when the merchant tries to request a deposit, a chargeback could be issued. A chargeback is a denial of the funds from the issuing bank. Customers can request a chargeback if they wish to attempt to stop the funds from being withdrawn.

In financial institutions and in some specific situations, an authorization code could refer to a special number that is given to a person who has access to a managed account for the purpose of investment. These people are charged with making investments on behalf of the owner of the account. The authorization code serves as a security method for the transactions. A code used in this way helps to keep track of who is making purchases and aids in bookkeeping, accounting and overall transparency.

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