The Merchant’s Guide to Authorization Holds
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. Nearly all merchants who accept credit cards, however, can benefit from this helpful tool. Let's take a look at what an authorization code is, how it works, and why you should consider using it.
What is an Authorization Hold?
- Authorization Hold
An authorization hold is a temporary hold placed on a portion of the funds or available credit in a cardholder’s account. This usually done because the final total of a transaction is unknown at the time authorization is requested, such as at hotels or gas pumps.
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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. An authorization 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:
- A customer swipes or dips a payment card.
- The authorization request is sent to the cardholder's issuing bank.
- Assuming the transaction is authorized, the bank automatically puts a hold on the transaction amount.
- You submit the transaction for settlement in your next batch.
- The temporary hold is released, and the final cost of the purchase is transferred from the customer’s account to yours.
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, it could still take several days for the funds 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).
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Why Use Authorization Holds?
While they do have limitations, authorization holds are highly useful in numerous MCCs.
Lodging is a good example; hotel guests know the price of the room beforehand, but they may use room service during their stay. They could also check out early, or charge a bar tab to their room. As a result, hotels don't know exactly what a customer's final bill will be until after checkout. So, they can place an authorization hold for a projected total on the cardholder’s account, which they can then replace with a final total.
Authorization holds can offer multiple benefits other for you as a merchant, too:
They Make Sure You Get Paid
With a hold in place, customers can't spend your money—either accidentally or intentionally—before you settle the transaction.
They Make Refunds Easier
The funds are simply released from the hold if an order is canceled before settlement. This saves you the time, hassle, and fees of processing a return.
They Keep Customers Happy
Customers feel more secure knowing that their cards won’t be charged until their order is shipped. For merchants, authorization holds help minimize risk of offering delayed billing.
Those are the direct benefits. If we take a broader view, though, we can see an authorization hold as a great way to help prevent chargebacks.
It’s still important to settle transaction batches quickly. However, using a pre-auth gives you time to validate charges and look for potential fraud. As long as the funds for a transaction are held but not settled, the cardholder can’t dispute the transaction or issue a credit or debit card chargeback.
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 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) in 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, though, you could get slapped with a misuse fee.
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Can Authorization Holds Go Wrong?
We just touched on misuse fees above. There are other potential pitfalls you need to avoid with authorization holds too, though.
As we've seen, all of the parties involved—merchants, banks, and card networks—set time limits on how long a hold can last. These limits can clash with one another, creating confusion about allowable time frames for authorization holds. Issuers can also have different mandates for different types of sales. These authorization hold timeframes can even differ for debit and credit cards.
Risk Factor #1: Time Limit Discrepancies
As we saw in the time limit chart above, some industries are allowed to place an authorization hold for longer periods, or for more than the immediate transaction cost. You typically have ample time to get the transaction settled, but these pre-authorizations eventually do time out. But, to be sure, you need to familiarize yourself with the specific requirements of any card brand you accept.
Risk Factor #2: Inaccurate Recordkeeping
The other major drawback is that using an authorization hold demands accurate and consistent recordkeeping. There’s no room for administrative mistakes or duplicate holds. These can cause delays, confusion, and unhappy customers. In turn, those issues translate to additional fees, fines, and even cardholder disputes or bank chargebacks.
Risk Factor #3: Double Holds
It's possible to accidentally place multiple authorization holds on a single transaction. This could happen for a number of reasons, like incorrect use of incremental authorizations, or using "test" transactions to verify accounts. Neglecting to quickly reverse holds for canceled transactions can cause this problem, too. If this happens, the cardholder will file a chargeback.
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.
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How do authorization holds work?
Authorization holds temporarily freeze funds or available credit in a cardholder’s account. The amount of the invoice is locked until the transaction is settled and the bank transfers the funds to the merchant’s bank.
What is the purpose of an authorization hold?
Using authorization holds helps ensure you get paid, makes refunds easier, and generally helps keep customers happy. Another benefit is that pre-auths help defends against chargebacks and other types of fraud.
How long does authorization hold last?
Authorization hold timelines can change based on merchant category code (MCC), product, and other variables. They’re generally meant to be removed on the same day they’re placed, but can be in place for weeks in cases like lodging and travel.
Is there any reason not to use authorization holds?
If your recordkeeping isn't exemplary, authorization hold errors can lead to fines, confusion, and unhappy customers. You must be able to consistently and accurately record all transactions and be able to match authorization amounts to transaction amounts.