What is an Authorization Rate?

Authorization rate refers to the percentage of successfully authorized transactions out of the total number of attempted transactions.

How Does the Authorization Rate Work?

It is a critical metric in payment processing that measures the effectiveness of transaction authorization. When a customer initiates a transaction, such as making a purchase online or at a point of sale, the payment gateway sends an authorization request to the cardholder’s issuing bank to verify the availability of funds and approve the transaction.

Here’s how the process works and how the authorization rate is calculated:

1. Authorization Request: When a customer attempts a transaction, the merchant’s payment gateway sends an authorization request to the issuing bank associated with the customer’s payment card.
2. Verification Process: The issuing bank receives the authorization request and verifies the transaction details, including the availability of funds, the cardholder’s identity, and any risk factors associated with the transaction.
3. Authorization Response: Based on the verification process, the issuing bank sends an authorization response back to the payment gateway, indicating whether the transaction is approved, declined, or requires further action (such as additional authentication).
4. Transaction Outcome: If the transaction is approved, the funds are reserved in the cardholder’s account, and the transaction can proceed. If the transaction is declined, the customer is notified, and the transaction is not processed.
5. Calculation of Authorization Rate: The authorization rate is calculated by dividing the number of successfully authorized transactions by the total number of attempted transactions and expressing the result as a percentage.

Formula for Authorization Rate Calculation:

Authorization Rate= (Number of Successfully Authorized Transactions / Total Number of Attempted Transactions) × 100

Key Considerations for Authorization Rate:

• Transaction Success: A higher authorization rate indicates a greater percentage of successful transactions, reflecting positively on the merchant’s payment processing efficiency and customer experience.
• Fraud Prevention: Monitoring authorization rates helps merchants identify potential issues with transaction approvals, such as false declines or fraud prevention measures that may be overly restrictive.
• Optimization Opportunities: By analyzing this rate across different transaction types, regions, and payment methods, merchants can identify opportunities to optimize their payment processes and improve overall transaction acceptance rates.

Understanding and monitoring this rate is essential for merchants to optimize their payment acceptance strategies, minimize transaction declines, and enhance the overall customer payment experience. By leveraging data insights and implementing best practices, merchants can maximize authorization rates and drive revenue growth in their business.