Credit card authorization occurs during a sale, whether over the phone, online, or in person. This quick preapproval process occurs automatically millions of times a day. While payment authorizations ensure your business gets paid, certain transactions pose more risk, necessitating a signed credit card authorization form.
Although most consumers have used electronic payment methods and many companies accept them, not everyone understands the credit card authorization process. Knowing what a payment authorization form is and when to use it can guide your decision-making process. Explore the tips below to process large card not present (CNP), business-to-business (B2B), and recurring transactions.
What is a credit card authorization?
A payment or credit card authorization (cc auth) confirms that the shopper can pay for their purchase. It occurs when a customer uses an electronic payment method like PayPal or major credit and debit cards like Visa or Mastercard. Every time a shopper swipes, dips, or taps, your point of sale (POS) or payment terminal sends the data for a card purchase authorization. The same goes for online, invoice, and phone sales.
[Read more: A Quick Guide to Credit Card Processing]
How do credit card authorizations work?
To accept credit cards, small businesses must partner with a payment processor, like Helcim, Payment Depot, or Merchant One. They provide the infrastructure and technologies to communicate with credit card networks and financial institutions. As long as your company has an established relationship and systems in place (online payment gateway, virtual terminal, or card reader), payment authorization happens automatically.
Here’s how the card authorization process works:
- The customer initiates the sale. The process begins when a buyer clicks submit after entering card details at checkout or tapping their card on a reader. The same goes if you enter a phone order for a CNP transaction.
- Your processor sends an authorization request. When the card information goes to the payment processor, the technology analyzes it to determine the customer’s financial institution and sends the authorization request to the appropriate bank.
- The client’s bank reviews the request. It assesses the transaction for fraud and confirms if funds are available and that the cardholder has no account restrictions.
- It approves or declines the purchase. The bank replies, and the message travels over the credit card processor’s network.
- The payment terminal receives an authorization code. At this point, the online checkout or in-person card reader displays a message of approval or denial. When approved, the transaction processes, and the sale is finalized. If denied, you will usually get an error code.
How does payment pre-authorization differ from authorization?
While many payments happen instantly, others occur when products are delivered, or the bill is finalized. This applies to rental car agencies, hotels, and Instacart orders.
For instance, when a traveler checks into a resort, the hotelier requests authorization for the room fees and can delay the capture of payment (and the specific amount) until the guest checks out. Any additional expenses, like room service, are added during the stay and charged on the final bill. The hotel may use a pre-authorized credit card form to ensure guests understand that any in-room charges will be added to their final bill.
[Read more: How To Streamline Payment Processing]
Why do credit card authorization rates matter to small businesses?
Credit card authorizations appear as transaction approvals or denials to a shopper or merchant. A declined payment method is inconvenient, frustrating, and embarrassing for customers, especially when shopping in person. They might abandon the shopping cart or blame your payment system.
Every denial could mean a lost sale. High payment acceptance rates translate into better buying experiences and happier customers.
Another consideration is chargebacks. While authorization of a credit card allows a sale, the customer can still back out later by claiming fraud. This issue is more likely with high-dollar purchases, over-the-phone sales, online transactions, and recurring subscriptions. A signed credit card authorization form deters consumers from initiating false claims and provides evidence of legitimacy when a chargeback occurs.
A credit card authorization form is an excellent way to reduce chargebacks because it proves that your customer approved the charge.
What is a credit card authorization form?
A letter of authorization for credit card use is a digital or physical form permitting businesses to charge a payment method. The document says the cardholder agrees to the merchant’s terms for the specified products or services. Customers must sign the credit card authorization form electronically or physically. An authorization letter for credit card charges is valid until all payments are finalized.
[Read more: How to Choose a Credit Card Processing Provider]
When should you use a form to authorize credit card payments?
Credit card authorization forms suit many situations because they protect businesses against chargebacks and fraud. However, any company that keeps a customer’s card on file for recurring payments needs a credit card authorization letter. This document lets you charge their card again without requesting permission.
You might use a form to authorize credit card payment in the following cases:
- B2B transactions: Payment authorization forms for business clients enhance the billing process by pre-authorizing purchases up to a certain amount.
- Recurring payments: Automating online subscription, membership, and installment payments reduces missed payments and improves cash flow.
- Large-ticket items: When your company sells high-dollar products like electronics, cars, or furniture, a signed authorization form provides additional fraud protection.
- Advance sales: If you design custom art, require a deposit, or place a made-to-order item, consider using a credit card authorization form.
- CNP transactions: Whenever the cardholder isn’t present or doesn’t have a physical credit card, the risk increases, and an authorization letter is appropriate.
Where to find free credit card authorization form templates
Your credit card processor may provide free forms or templates for one-time and recurring transactions. Likewise, e-commerce platforms, POS software, and help desk solutions typically offer built-in payment authorization templates. Alternatively, you can use an electronic signature and document program like Docusign or Dropbox Sign (formerly HelloSign) to make an authorization letter for a credit card.
A free credit card authorization form has the following fields:
- Cardholder name.
- Credit card type, such as Visa, Mastercard, American Express, or Discover.
- Card number.
- Expiration date.
- The cardholder’s billing address.
- Merchant’s business information.
- A general message authorizing charges.
- Cardholder’s name and signature.
- Date.
Standard templates may allow customization. You could add your business logo and information to assist your billing department, like the invoice or purchase order number. This is also an excellent spot to put any additional terms or conditions.
While extra details are helpful, remember to consider the customer experience as well. If they have to fill out a lengthy form for a subscription, it may not be worth their time. However, requesting a cardholder’s phone number isn’t mandatory but is a best practice.
[Read more: How to Reduce Your Credit Card Processing Fees]
How to use a credit card authorization form
Businesses can use physical or digital credit card authorization forms, although electronic versions are easier to manage security-wise. Brick-and-mortar stores provide customers with hard copy forms to fill out, or they can enter details on a tablet.
For online purchases, the payment authorization letter is part of the checkout process. Subscription services like Amazon’s Subscribe and Save allow customers to check a box to agree to the terms and authorize recurring payments.
Conversely, you can physically mail the form to clients or email an electronic version. However, transmitting credit card information over email raises security concerns. A better solution is to use a third-party service like Docusign.
Payment Card Industry Data Security Standard (PCI DSS) compliance standards define how merchants must receive permission to keep a card on file and rules for proper data storage. Failure to adhere to these guidelines increases your liability if a data breach occurs, increases the risk of fraud, and can result in a PCI noncompliance fee.
Tips for protecting against chargebacks and improving authorization rates
A credit card authorization form is an excellent way to reduce chargebacks because it proves that your customer approved the charge. However, you can take other steps and get assistance from your payment processor to improve authorization rates.
Digital wallets like Google Pay and Apple Pay use biometric verification, reducing fraud risk. Consequently, these payment methods have higher acceptance rates than other options. Many credit card processing services, including Stax, ProMerchant, and Clover, support digital payments.
When choosing a payment provider, look for fraud prevention and detection features. For instance, customers using the Helcim Commerce platform can activate Helcim Fraud Defender to assess risk before approving online transactions. In addition, Payment Depot offers breach detection for extra peace of mind.
CO— aims to bring you inspiration from leading respected experts.
However, before making any business decision, you should consult a
professional who can advise you based on your individual situation.
CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.
