Authorization HoldWhen Deployed Effectively, Payment Card Authorizations Can Prevent Chargebacks

What You Need To Know About Authorization Holds & How They’re Used

Placing an authorization hold on a credit card transaction is a smart, safe, and easy way to reduce costs and prevent unnecessary hassles, like having to reauthorize a transaction or provide a refund. They can also protect you from fraud and help prevent chargebacks, too.

The use of authorization holds is a standard procedure within some industries. However, nearly all merchants who accept credit cards can benefit from this helpful tool. Let's take a look at what a hold is, how it works, and why you should consider using it.

What is an Authorization Hold?

Authorization Hold

[noun]/aw ● ther ● uh ● ZAY ● shunn ● hohld/

An authorization hold is a temporary hold placed on a portion of the funds or available credit in a cardholder’s account. This is usually done because the final total of a transaction is unknown at the time authorization is requested, such as at hotels or gas pumps.

Authorization is the bank’s way of saying that the customer has the funds or credit available for the purchase. You will eventually get the funds if the authorization request is approved. However, this will only happen after the transaction is settled.

Let's say you operate a gas station, though. Your customer swipes a credit card before pumping their gas, which means you have to seek authorization before you learn the total cost of the transaction. This is where authorization holds come in.

As a merchant, you can use an authorization hold (sometimes known as a “pre-authorization” or “pre-auth”) to ensure you actually get paid for purchases made via credit or debit card. A hold locks in the funds you're owed due to a payment card transaction until that transaction is settled and the bank transfers the funds to the merchant’s bank.

How Do Authorization Holds Work?

To understand how pre-auths work, it helps to take a step-by-step look at the entire card transaction process:

An authorization hold temporarily decreases the consumer’s available credit limit (for a credit card) or available funds (for a debit card). However, the amount held should be a reasonable figure based on the type of transaction.

The actual funds transfer only happens after you submit a batch of transactions to your acquiring bank. Even if you submit batches regularly, the funds could still take several days to show up in your account. That timing could create a problem.

Without an authorization hold, a cardholder could theoretically make a purchase, then drive straight to an ATM and withdraw all the money in the account. If that happens, you get stiffed. But with a credit card authorization hold in place, the cardholder can’t access the money. It remains on hold until settlement (or until the time limit runs out).

Why Use Authorization Holds?

An authorization hold is designed to slow a transaction down long enough to verify everything is as it should be before funds are exchanged. Using holds is beneficial for you and your customers because it helps secure payment without immediately drawing funds from the customer's account. It allows for adjustments and provides transparency throughout the transaction process.

Let’s break down how imposing an authorization hold benefits both parties involved in a transaction:

Benefits for Merchants

Benefits for Consumers

When Should You Use an Authorization Hold?

Implementing authorization holds can be useful when services or goods are consumed over time, or additional charges may apply based on usage. The unifying thread in these scenarios is the need to secure payment while providing flexibility to adjust final charges based on actual consumption or use.

Below are a few common scenarios and examples illustrating when using an authorization hold would be both useful and necessary:

How Long Can a Credit Card Authorization Be Held?

The time limit for an authorization hold depends on different factors. Your merchant category code (MCC), the card network, and the type of payment card used all play a role. Most debit card transactions have a hold time of between one and eight business days. For credit card transactions, though, the hold might last as long as a month.

The card networks understand that this can create problems for both merchants and cardholders. Their regulations reflect a delicate balance. They want to give you enough time to settle the account while holding the customer's funds for as short a time as possible. To illustrate, let's look at regulations from one of the card networks.

Visa rules offer the following authorization hold limits based on the type of transaction:

Type of Transaction	Authorization Hold Limit
Most Card-Present Transactions	Day of authorization**
Most Card-Not-Present (CNP) Transactions	7 days from the date of the initial authorization
Lodging, Vehicle Rentals, & Cruise Lines	31 days from the date of the initial authorization
Other Rental Merchant Categories	7 days from the date of the initial authorization
Commuter Transportation (Buses, Trains, etc.)	3 days from date of initial authorization (US only)

^{** In other words, the transaction must be submitted for processing on the same day authorization was granted.}

Awareness of authorization hold time limits is important for two reasons. First, if you don't settle the transaction in the allotted time, you must resubmit the transaction for processing. This is a hassle at best…and impossible at worst.

The other reason is what’s called a “misuse fee.” This is when Visa or Mastercard imposes fees for authorizations that are not settled (or reversed) within the given time limit. This might happen if you don't charge an account until after shipping an order. For customers, this is reassuring; they won't see the charge until their purchase is on its way. If the order is delayed and the pre-auth remains unsettled for too long, you could get slapped with a misuse fee.

Can Authorization Holds Go Wrong?

Yes. While authorization holds are an important tool in managing transactions, there are instances where they can lead to complications, affecting both merchants and consumers. Here are a few examples in which an authorization hold can be mismanaged or deployed improperly:

Authorization holds are generally beneficial and widely used. That said, awareness of their potential complications and implementing strategies to mitigate these risks is essential for smooth financial transactions. 

Best Practices for Deploying Authorization Holds

Deploying an authorization hold effectively requires a balance. You have to think about safeguarding your business's financial interests, and also ensuring a positive customer experience. To navigate this, here are some best practices to follow when implementing authorization holds:

#1 |  Clear Communication

Always inform customers upfront about your authorization hold policies. This includes the amount to be held, the reason for the hold, and how long the funds will be held before release. Transparency helps build trust and understanding, reducing potential friction.

#2 |  Provide Accurate Hold Amounts

Estimate hold amounts as accurately as possible. For services where additional charges might accrue (e.g., hotels, car rentals), ensure the hold covers potential expenses without excessively tying up customer funds.

#3 |  Timely Processing

Process authorization holds and final charges promptly. Once the service is rendered or the product is delivered, finalize the transaction quickly to release any excess held funds back to the customer's account. You want to minimize any financial inconvenience.

#4 |  Avoid Excessive Hold Amounts

Never place holds for amounts significantly higher than the expected transaction value. This can lead to potential financial hardships for them, impacting customer satisfaction and potentially leading buyers to demand a cancellation or refund.

#5 |  Eschew Long Hold Durations

Avoid unnecessarily long hold durations. Once the transaction is complete, or it's clear that the hold amount will not be needed, release the hold as soon as possible. Otherwise, the buyer may get antsy and call the bank for a chargeback.

#6 |  Rethink Inflexible Policies

Rigid hold policies that don’t account for special circumstances or customer feedback are probably a bad idea. Being flexible and responsive to individual situations can improve customer satisfaction.

#7 |  Regular Training

Make sure your staff is well-trained in the mechanics and customer service aspects of authorization holds. They should be able to explain the process to customers and resolve any issues that arise efficiently.

#8 |  Don’t Ignore Regulations

Be aware of, and compliant with, all relevant regulations and card network rules regarding authorization holds. This includes rules around the duration of holds and conditions under which they can be used.

#9 |  Monitor & Adjust Policies

Regularly review your authorization hold policies and practices. Be open to adjusting your approach based on customer feedback, business operation changes, or regulation updates.

#10 |  Technical Support & Backup

Keep your technical support readily available. In case of system failures that affect authorization holds, having a backup plan can help avoid disruptions.

Your business can use authorization holds to manage financial risks while maintaining positive customer relationships by adhering to these best practices. This balanced approach is key to leveraging the benefits of authorization holds without sacrificing customer satisfaction.

Authorization Holds: Great, but Not Enough

Regular use of authorization holds can be a simple and effective way to protect your business from chargebacks. It’s not enough by itself, though. You need a multi-tiered risk-management strategy that can evolve at the same pace as the payments space.

Ready to forget about chargebacks and get back to running your company? Chargebacks911® can take chargebacks completely off your plate and up your ROI. Contact us today to learn more.