Even if you’re a business that deals with some of the billion credit card transactions processed every day, the complexity of the process may be the only thing you’re aware of. But you may want to know about all the steps that happen behind the scenes—from the moment your customer submits a card for payment to the moment those funds hit your bank account.

We’ll cover what happens during the card authorization and settlement process each time your business processes a card payment.

What’s in this article?

• Who is involved in the authorization and settlement process?
  
• What is card authorization?
  
• How does card authorization work?
  
• What is capturing and settlement?
  
• What is transaction settlement?
  
• Card payment process
  

Who is involved in the authorization and settlement process?

There are a few key players who take every card transaction from beginning to end:

• Cardholder
  This is the person who makes the payment, whose name appears on the credit or debit card being submitted for payment. In a card transaction, the cardholder’s account is where the funds originate.

• Business
  This is the entity whose goods or services are being purchased during the transaction. At the end of this process, the funds will end up in the business’s bank account.

• Acquirer
  The merchant acquirer, also known as the acquiring bank, is a bank or financial institution that processes customer credit or debit card payments on behalf of the business and routes them through the card networks to the issuer, or issuing bank.

• Payment processor
  Payment processors act as intermediaries between businesses and card issuers. They move key information about a transaction between all parties—business, card network, issuer—to get payments authorized and settled. While the payment processor and merchant acquirer are historically separate entities, some businesses work with payment providers that offer both functions, such as Stripe.

• Card network
  A card network is the name for the major credit card companies and how they operate in a consumer capacity. In the US, the major card networks are Visa, Mastercard, American Express, and Discover. Card networks authorize and process credit card transactions, as well as settle the terms for transactions and move payments between customers, businesses, and their banks.

• Issuer
  An issuer, also called an issuing bank, is a financial institution that gives credit and debit cards and associated lines of credit to cardholders. Some card networks are also card issuers, meaning they issue and maintain consumer credit card accounts themselves. There are also over 200 other financial institutions that issue credit cards in the US.

What is card authorization?

Card authorization is the process in which the financial institution that issued a credit or debit card that’s been submitted for payment verifies that the card can be used for a given transaction.

How does card authorization work?

Card authorization begins when a card payment is accepted by a business, and the business’s payment processor reaches out to the card issuer. The issuer is given the details of the transaction—what card was used, the amount of the purchase, and what identity verification details were provided—and asked for approval. During authorization, the issuer checks to confirm:

• The cardholder has sufficient funds or available credit to cover the amount being requested for the transaction
  
• The card hasn’t been flagged as stolen, lost, or frozen
  
• The cardholder verification information matches the information on file for that card
  

The issuer will respond to the business’s authorization request with a two-digit code that conveys whether the transaction has been approved or declined. If the transaction is approved, the issuer will immediately reduce the balance or available credit on the account associated with the card, even though the funds won’t be transferred to the business right away.

For more information on how card authorization works and what businesses need to know, read our card authorization guide.

What is capturing and settlement?

The terms “capture” and “settlement” refer to different times in the card payment process when the funds from a transaction are transferred to the business’s bank account. Capture is when the merchant acquirer initiates the process to effectively act on the authorization it received from the issuer. Since card authorizations don’t expire right away—they usually last 5 to 10 days but can sometimes last for up to 30 days—the merchant acquirer has some flexibility about when they ask to receive the funds after a transaction has been authorized. When they do this, that’s capturing. Settlement is when the funds themselves are moved from the issuing account to the merchant account.

Card payment process

From start to finish, here’s each step of a card transaction process and how the main players work together:

• The customer submits a credit or debit card for payment, either online or in person.

• For in-person transactions, the business’s card reader and point-of-sale (POS) will accept the card information and relay it to the business’s payment processor.

• For online transactions, the same thing happens, except there is no physical card reader. The customer either manually inputs their card information, uses a digital wallet to pay with a stored credit or debit card, or uses a card on file with the business.

• The business’s payment processor (Stripe, for example) sends an approval request to the card issuer via the card network.

• The card issuer checks to verify three things related to the transaction:

  • The card itself is valid.
    
  • The cardholder’s identity is verified, typically by matching the billing address provided during checkout to the address on file for the card.
    
  • There are sufficient funds or credit available to cover the amount being requested for approval.
    

• If the card issuer is able to verify everything, they will approve the transaction and send an authorization code back to the payment processor through the card network.

• The payment processor communicates the approval back to the acquirer and the business’s payment terminal, online or in person. This usually takes place within a few seconds.

• Once a transaction is approved, the acquirer will retrieve the funds and hold them in the merchant account before transferring them to the business’s main business bank account, usually within a few days.

While card authorization and settlement might seem too granular and technical to be concerned with, having a strong functional knowledge of the process will help you spot inefficiencies, troubleshoot problems, and make sure that every part of your payment system is optimized to suit your business’s need.