
Credit Card Authentication
Credit card authentication is the process of confirming the validity of a customer’s credit card by checking with the company that issued the card. Once the card issuer authenticates the card and authorizes the purchase, the payment is recorded on the customer's credit card account and paid into the merchant's bank account. In a credit card transaction, the merchant acquiring bank is also the settlement bank, receiving the payment funds and depositing them in the merchant account. In addition to the customer, an electronic payment transaction involves four entities: the merchant, the merchant's bank, a network processor, and the issuer of the customer's card. Most banks are members of the major card networks such as Visa and MasterCard, which enables them to act as merchant acquiring banks on behalf of businesses that accept credit card payments.

What Is Credit Card Authentication?
Credit card authentication is the process of confirming the validity of a customer’s credit card by checking with the company that issued the card. Authentication is roughly the first half of the transaction process when using a credit card.
Once the card is authenticated, the purchase is approved or denied, the money is added to the customer's credit card bill, and the payment is credited to the merchant's account.



Understanding Credit Card Authentication
In addition to the customer, an electronic payment transaction involves four entities: the merchant, the merchant's bank, a network processor, and the issuer of the customer's card.
The merchant's bank is called the merchant acquiring bank. Most banks are members of the major card networks such as Visa and MasterCard, which enables them to act as merchant acquiring banks on behalf of businesses that accept credit card payments.
The merchant, using a network processor, requests that the merchant's bank handle processing of the transaction. Once the card issuer authenticates the card and authorizes the purchase, the payment is recorded on the customer's credit card account and paid into the merchant's bank account.
The Role of the Merchant Acquiring Bank
All merchants who accept credit or debit cards must work with a merchant acquiring bank. It is the middleman in this process, facilitating the transaction and then settling the funds for deposit into merchants' accounts.
What Happens When You Swipe
When a card is swiped or entered into a website, the details of the transaction are sent electronically to the merchant acquiring bank. The bank transmits the details to the card issuer for authentication.
The card issuer checks all the details including the card number and type, its security code, and the cardholder billing address. Issuers have various procedures in place to ensure that a transaction is not fraudulent.
Authorization Communication
Authorization communication is the next step in the credit card transaction process. The issuer sends the new authentication to the merchant acquiring bank. The bank receives the communication and authorizes the payment to the merchant.
The final authorization process also allows the merchant acquiring bank to initiate a deposit into the merchant’s account. Thus merchants rely on merchant acquiring banks for both payment processing and account servicing. In a credit card transaction, the merchant acquiring bank is also the settlement bank, receiving the payment funds and depositing them in the merchant account.
As any consumer knows, this fairly elaborate series of steps is completed in a few seconds.
Merchant acquiring banks typically charge merchants transaction fees and monthly account fees. Merchant acquiring banks also cover the risks of any issues arising with non-settlement, chargebacks, and refunds, which are covered by the monthly account fees.
Related terms:
Bank Identification Number (BIN)
A bank identification number (BIN) is the initial set of four to six numbers on a credit card that identifies the institution. read more
Credit Card
Issued by a financial company giving the holder an option to borrow funds, credit cards charge interest and are primarily used for short-term financing. read more
Mastercard
A Mastercard is any electronic payment card that uses the Mastercard network for processing transaction communications. read more
What Is a Merchant Account?
A merchant account is a business bank account allowing companies to accept payments and pay bills. read more
Payment Gateway
A payment gateway is the front-end technology that reads payment cards and sends customer information to the merchant acquiring bank for processing. read more
Private Label Store Credit Card Defined
A private label credit card is a store-branded credit card that is intended for use at a specific store. It offers credit and sometimes special benefits at those stores. read more
Processing Date
After a customer makes a credit or debit card purchase, the specific day the transaction is processed by a merchant is called the processing date. read more
Zero Liability Policy
A zero liability policy absolves a credit or debit cardholder from responsibility for fraudulent charges, but be sure to read the fine print. read more