What is Merchant Authorization?

Charity Delich

A merchant authorization is a practice commonly used by businesses that accept debit card or credit card payments, such as shops, hotels, rental companies, and restaurants. When a merchant authorization is made on a credit or debit card, the card company registers the authorization amount as unavailable to the cardholder. It remains unavailable until the merchant settles the transaction or the card company releases the hold. The transaction is usually settled within a few days for debit card purchases, although credit card processing can take up to several weeks in some cases.

Credit card being swiped through a terminal.
Credit card being swiped through a terminal.

A merchant authorization involves both an authorization of funds and a settlement into the merchant’s account. When a customer pays with a credit or debit card, the authorization occurs. Basically, the merchant swipes the customer’s card into a card processing machine, and the cardholder’s information is transmitted to the card company. The company verifies that enough funds are available to cover the purchase and that the card can be properly used. In addition, the company holds the amount of the purchase as unavailable to the cardholder, although the funds are not yet transferred to the merchant’s account.

When the merchant reconciles its credit and debit card sales, the card company then shifts the payment to the merchant account. For example, suppose that a customer with a $500 US Dollars (USD) credit card limit uses the credit card to buy a sweater for $60 USD. When the merchant swipes the card, the customer’s card company holds $60 USD on the account. The customer then has $440 USD available on the card. When the merchant closes out his or her accounts at the end of the day, the $60 USD will be transferred into the merchant account.

Usually, a merchant authorization can be stopped using a procedure called an authorization reversal. Most card companies that support reversals require them to be made within a short period of time, usually a few minutes, after the first merchant authorization was made. In addition, card companies usually cancel debit or credit card transactions at the request of the cardholder.

Issues with making a merchant authorization can arise. For example, a merchant may inadvertently authorize a card twice, even though he ultimately reconciles the sale only once. For the cardholder, this may mean a temporary reduction in available funds. Additionally, when merchants wait for a few days or weeks to settle their sales, cardholders may miscalculate their available funds and end up overextending themselves. Confusion can also arise when a merchant attempts to void a transaction or to hold a transaction for an amount other than the settlement amount.

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