Using Authorization Holds to Prevent Chargebacks
Placing authorization holds for credit and debit card transactions is a vital aspect of transaction processing.
What is an Authorization Hold?
Authorization holds are also known as card authorizations or pre-authorizations and are part of the authorization process.
While processing a transaction, the merchant will contact the cardholder’s issuing bank, requesting an authorization code. The bank’s response to the authorization request will tell the merchant how to proceed. Common responses include:
|Approved||The account is in good standing, the card has not been reported lost or stolen and has sufficient funds to cover the transaction.|
|Declined||The account is not in good standing, the card has been reported lost or stolen, or the account doesn't have sufficient funds to cover the transaction.|
|Referral||The bank requests direct contact with the merchant before processing the transaction.|
|Hold-Call||The bank wants to remove the card from circulation.|
|Call||The bank requests direct contact with the merchant before processing the transaction.|
|Expired Card||The credit card has expired.|
|Pick Up Card||The bank wants to remove the card from circulation.|
If the authorization request is approved, the merchant is able to proceed with the transaction by placing an authorization hold on the cardholder’s account.
An authorization hold temporarily decreases the consumer’s available credit limit (credit card) or available funds (debit card).
Why Use Authorization Holds?
Completing a payment card transaction involves two steps: authorizing the purchase and settling the transaction. The authorization process simply assures the merchant that the purchase can be made; it doesn’t transfer funds from the cardholder to the merchant.
Moving funds from one account to another only happens after the merchant has settled a batch of transactions with the acquiring bank, and that process could take several days.
Once the bank has determined the cardholder has sufficient funds available to cover the cost of the transaction, the merchant will hold those funds, ensuring they are still available once the batch is settled.
The length of an authorization hold will depend on the business’s MCC code. Most debit card transactions have a hold of one to eight business days. For credit card transactions, the hold might last as long as a month.
Some industries are allowed to place an authorization hold for more than the transaction amount. For example, a hotel will estimate the final bill and place a hold for that amount. However, the final purchase amount won’t be known until the hotel staff can review the guest’s activities (room service, long distance calls, etc.).
An Authorization Hold Example
Below is an example of an authorization hold placed after a debit card transaction. The pending transaction was for $10. While the actual account balance isn’t affected until the transaction is completed, the amount of money available to the cardholder has decreased by $10.
The authorization hold placed on a credit card transaction (instead of a debit card) would be very similar. If the monthly bill was sent before the transaction had been settled, the balance would be $0. However, the cardholder would have $10 less available credit.
Using Authorization Holds to Reduce the Risk of Fraud
It is important for merchants to settle transaction batches quickly. This is a key factor to preventing late presentment chargebacks. However, it isn’t always advantageous to settle payments immediately.
Merchants should take the time to validate charges with the cardholder and look for potential indicators of fraud. While these anti-fraud measures are taken, an authorization hold can reserve the funds that are necessary to complete the transaction at a later date.
Using an authorization hold could help reduce the risk of chargebacks, but it is just one small piece of the puzzle.
Chargeback prevention is a daunting task. Merchants need to implement a dynamic strategy that adapts at the same pace as fraud evolution. If you’d like help managing chargebacks, let us know. We’ll show you exactly how much more you could earn by preventing chargebacks and winning representment.