What Is an Authorization Code in a Bank Transaction?

What Is an Authorization Code in a Bank Transaction?
What Is an Authorization Code in a Bank Transaction? | Pinkypills/iStock/GettyImages

"Authorization code” is a term that is widely used in the banking and merchant service industries. The code only applies to merchants who use an electronic payment gateway to process customer transactions. When a merchant ignores the importance of an authorization code, there may be expensive repercussions.

Authorization Response

Whenever you use a debit card or credit card, the card issuer returns an authorization response to the merchant. This alerts the merchant if the transaction is approved or declined. An authorization code is only issued when the authorization response reads “Approved.”

Authorization Code

The authorization code is a number that confirms your debit or credit card transaction is approved. For this reason, it is also referred to as an “Approval Code.” The number can be numeric or alphanumeric, and is usually six to seven digits in length. An authorization code appears on the merchant's receipt printout. For transactions that don't yield a paper receipt, you or the merchant must write down the code and retain it for your records.

Relevant Transactions

Authorization codes are not issued for transactions involving checks, only debit and credit cards. Authorization codes are issued when you make purchases via point of sale terminals, Automated Teller Machines, Internet or telephone. The code is issued for real-time transactions. If a merchant does not use an electronic payment gateway to process card transactions, an authorization code is not issued.

Importance of Authorization Codes

Occasionally, there are problems processing transactions. The merchant may think that a purchase is approved, when it actually hasn't been approved. Perhaps a transaction is approved, yet the bank is saying it was not approved. If the merchant does not have an authorization code, he risks not being paid. The authorization code is the only way a merchant can prove to the card issuer that a transaction was approved. If the card issuer authorizes a transaction, it is obligated to pay the merchant. If an authorization code is not issued, the merchant can receive a "no authorization" chargeback. In a chargeback, any payment the merchant receives is reversed by the card issuer.