Credit Card Authentication

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.