How Does Authorization Hold Work?

Understanding how authorization hold works is very important for merchants and customers alike. Confusion about what it is and how it works can lead to unpaid invoices or unhappy customers.

So let’s take a look at the process of authorization hold.

What Is An Authorization Hold?

An authorization hold is a temporary restriction on the funds or available credit of a cardholder to the value of a transaction amount.

This ensures that as a merchant, the funds you are due for a product or service are locked in until the transaction is settled. It works for both debit and credit card transactions.

The payment processor receives the information about the card from the merchant. They verify through the issuing back that it is valid and that there are sufficient funds available to cover the transaction.

Payments can be settled immediately, at the end of the day or depending on the card type with weeks of the authorization hold.

When Is It Used?

Authorization hold or pre-authorization is particularly useful for services such as gas stations or hotels where the final transaction amount will not be immediately apparent.

For online transactions, it means the merchant can lock in the amount owed, but the customer will not be charged until their goods are shipped.

This practice is now widely used for both credit and debit card transactions. When the final cost of a bill is unknown, it gives a business the confidence that funds have been set aside.

For customers, it offers reassurance that they will only be charged when a product has been dispatched or a service finalized.

How Does Authorization Hold Work?

Authorization hold is a way for the cardholder’s bank to confirm that the funds due for a transaction are available before you finish processing the order.

This offers reassurance that you will be paid what you are owed as a merchant or business.

So for example if you run a hotel your customer will present their card, and you run it through the reader for authorization.

This request goes to the cardholder’s issuing bank. If authorized, the bank puts a hold on the transaction amount.

When you submit your transactions for settlement, the temporary hold is released and the final cost is transferred from the customer’s bank account to yours.

What Are The Benefits Of Authorization Hold?

For businesses, the benefit of an authorization hold is the reassurance that bills will be settled or invoices paid.

Knowing that the funds to cover a transaction have been reserved means there is no concern about a customer defaulting on a payment.

Funds Are Secured

Without an authorization hold, in theory a cardholder could make a purchase, but before the transaction is settled remove the funds from their bank account.

An authorization hold freezes the amount of the transaction. This means that the cardholder’s available funds or credit limit are reduced by that amount and so cannot be accessed.

It is ideal for services such as gas stations where the final amount is not known until the customer stops filling their vehicle.

An authorization hold for a projected total ensures that there are sufficient funds to cover the purchase before the customer proceeds.

Incidentals such as hotel bar tabs or rental car excess mileage costs can also be covered this way.

No Need For Refunds

If a transaction or service is canceled by the customer following an authorization hold, the merchant can simply release the hold on the funds.

This means there is no need to process a refund, which saves time, paperwork, and money.

Prevents Chargebacks

An authorization hold makes it difficult for a chargeback to be requested by the cardholder or their issuing bank, as the funds are held but not settled immediately.

A transaction cannot be reversed if it hasn’t been processed. This means there is less damage to your merchant account, as chargebacks are counted as strikes against you and can incur chargeback fees if they happen too often.

Fraud Prevention

It is also a good way for your business to ensure that no fraud is being attempted, as you can carry out checks while the authorization hold is in place.

This is especially useful for businesses that are frequently targeted by card fraud.

What Is The Time Limit For Authorization Hold?

The time limit for authorization hold depends on several factors such as the merchant category code, the payment card type and the card network.

Typically, the timeframes are around one to eight days for a debit card or up to a month for a credit card.

What If The Time Limit Is Exceeded?

Card networks must balance the need to hold the funds until the transaction is settled with simultaneously ensuring that the customer is not unduly inconvenienced.

Sticking to the timeframes is important as a merchant. If you exceed the authorization hold time, you will have to resubmit the transaction for processing.

You may also be charged a ‘misuse’ fee if a transaction is not submitted for settlement in the time allowed for the authorization hold.

This could be due to delays with orders, but as a merchant you are responsible for ensuring that settlement happens promptly.

Summary

Authorization hold is an excellent way to protect your business from the possibility of defaulted payments.

It provides a trusted method of ensuring that any service or product that you are offering will be paid for by your customer.

In effect, an authorization hold is a type of insurance mechanism for businesses and merchants.

With all of this information, you will be able to decide if using authorization hold is appropriate or helpful for your business.

If chargebacks or fraud are an ongoing problem for you, then it is certainly worth considering.

Similarly, for industries where incidental purchases are common, such as the hospitality sector, it is a valuable protection against non-payment.

Speak to your card processor today about the options available to you for authorization hold on your transactions.

Also, learn as much as you can on the topic in our knowledge database.