When it comes to processing payments, there are two major components: payment authorization and payment settlement. Although these terms may seem interchangeable, they actually have distinct meanings and serve different purposes. Knowing the difference between the two can help business owners better understand their credit card authorization process and ensure smoother transactions for their customers.
What Is Payment Authorization?
Payment authorization is the process of verifying that a customer has enough funds to cover the cost of an item or service. This authorization occurs in real-time, meaning it confirms with the issuing bank whether or not a credit card has sufficient funds and is valid.
If the issuing bank approves the payment, then the customer can proceed with their purchase. However, if there are insufficient funds or if the card is invalid, then the transaction will be denied. Payment authorization does not actually transfer funds—it ensures that the customer has enough money to make the purchase.
What Is Payment Settlement?
Settlement is the actual transfer of funds from the customer’s bank to the merchant. This process happens after payment authorization is completed, and it can take anywhere from one to three business days.
During settlement, the customer’s bank pays the merchant for the purchase, minus any processing fees. Once payment has been settled, the customer will receive an email or phone notification that their card was successfully charged.
What Differentiates Payment Authorization and Payment Settlement
The major difference between payment authorization and settlement is that authorization verifies if funds are available for a specific purchase, while settlement is the actual transfer from bank to merchant.
Payment authorization can generally be completed instantly, whereas settlement may take up to three business days. It is important for merchants to understand this distinction in order to provide customers with an accurate expectation when making purchases online or through payment terminals.
PCI Booking Is Your Credit Card Authorization Solution
At PCI Booking, our goal is to provide businesses with the functionality they need to perform all actions on credit cards. Our Universal Payment Gateway offers merchants a single API endpoint through which they can send either an authorization or settlement (or several other types) request directly to their payment processor of choice.