When a credit card or debit card holder buys a product or service with their card, it is necessary for the merchant to verify there are sufficient funds or sufficient credit available to authorize the purchase. This is the core function of credit card processing.
Each merchant has a merchant account with their bank which is set up to accept credit card payments. When a purchase is made, the merchant’s bank will request an authorization from the cardholder’s bank. To prevent this process from generating receipts and cumbersome paperwork, each payment system has instituted what they refer to as “authorization codes” or “transaction approval codes.”
When the merchant bank presents the charge to the cardholder’s or customer’s bank through their merchant account, the cardholder’s bank verifies there are sufficient funds or credit available. If either is available, the cardholder’s bank will transmit an authorization code back to the merchant bank signaling it is okay for the transaction to be approved. This code is generally a six-digit number unique to the transaction and account so it may be used as an indication of a successful transaction in credit card processing. It can be considered analogous to a signature or receipt.
If a transaction requests funds that are not available or requests a purchase that exceeds that customer’s credit limit, then the cardholder’s bank will decline the transaction and fail to provide an authorization code. This signals the merchant’s bank the transaction cannot be approved and that the customer will have to use an alternative form of payment.
Authorization codes are a kind of shorthand used by payment processing systems to minimize the verification steps necessary in a business that employs heavy use of credit card transactions in order to sell products and services. Very often the kinds of businesses that need rapid access to purchase authorizations simply cannot employ a more cumbersome means of verifying a customer has suitable funds to complete a purchase, such as a phone call.
Payment systems have become fairly efficient in their ability to generate a verifiable means of authorizing transactions on a purchase-by-purchase basis. This gives merchants a flexible high-speed way to sell more products and services while avoiding the possibility of errors. The authorization code is the key to such a system.