In payment card processing, the concept of "authorization" and "clearing" are two distinct steps that are part of the overall transaction process.

Authorization

Authorization is the first step of a card transaction. When a cardholder initiates a purchase, the merchant sends a request to the customer's bank to check if there are sufficient funds or credit limit available to cover the transaction.

If there are sufficient funds, the bank will put those funds on hold (known as an "authorization") for the amount of the purchase. At this point, no funds have been moved.

The authorization step allows merchants to confirm whether a transaction is possible before finalizing it. It also protects against attempts to purchase more than is available on a card.

Pending

Once a transaction has been authorized, the funds are considered "pending". This means they have been reserved for the transaction, but the transfer of funds from buyer to seller has yet occurred.

The funds remain in this state until the transaction is "captured" or "settled" by the merchant. When this occurs, the funds are moved from the cardholder's account to the merchant's account. If the merchant does not capture the transaction within a certain timeframe (typically 7 days), the authorization will expire and the funds will be released back to the company balance.

Clearing

Clearing occurs after the merchant has fulfilled the transaction - such as shipping the goods or providing the service.

In this step, the merchant sends information about the final amount of the transaction, which can be adjusted in cases like adding tips, discounts, or if the order has changed. This amount will be "cleared", meaning the previously authorized funds will be transferred from the cardholder's bank to the merchant's bank.

Benefits

Separating authorization and clearing is particularly important in certain types of businesses, like restaurants, hotels, car rentals etc. where the final transaction amount might change after initial authorization.

This model allows for flexibility, minimizes the risk of chargebacks, and enhances overall customer experience. The separate clearing step also allows merchants to manage their cash flows more effectively by giving them the ability to choose when to batch out and receive funds.

With digital goods or fast-paced retail environments, certain transactions may use "auth and capture" (where authorization and clearing are combined) to allow for speed and convenience.