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.
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. 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. To understand how pre-auths work, it helps to take a step-by-step look at the entire card transaction process:. 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. It remains on hold until settlement or until the time limit runs out. 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.
With a hold in place, customers can't spend your money—either accidentally or intentionally—before you settle the transaction. 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. 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.
However, using a pre-auth gives you time to validate charges and look for potential fraud. 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. These preset authorizations then are adjusted to the actual amount of the purchase, and a request for capture can be submitted.
This process can leave a pending authorization in place for 1 to 7 days. When a bill is presented in a restaurant, the credit card authorization will cover the exact price of the food, drinks and taxes, but does not include the tip. Like gas stations and hotels, this requires an extra step to adjust the total amount of the bill to include the tip, and it must be done manually due to tips being written by hand. One factor that determines the length of time that a pending authorization stays on an account is how quickly the finalized bills can be submitted to the merchant services company for capture.
Once the final bill with the tip included is submitted, settling the transaction and removing the pending authorization takes 1 to 3 days.
Generally speaking, a charge that is authorized but not captured by a merchant will be listed as a pending authorization for a limited amount of time. Examples of this type of occurrence include a restaurant neglecting to adjust charges to include tips, or a gas station that doesn't change a preset authorization to the actual expenditure on a credit card.
While the standard practice in the industry is that pending authorizations expire if a transaction isn't captured and settled within 30 days, the required time frame for settlement is set by each credit card issuer. If a pending authorization expires, the merchant will have to contact the customer for a new authorization to charge the credit card.
An authorization that occurs from a card being swiped in error can be voided if the mistake is caught before the merchant's charges are submitted for processing at the end of the day. This usually will prevent the posting of a pending authorization. If the mistake isn't caught until after submission for processing, the original charge will show as a pending authorization in the card holder's account. Depending on the card issuer and how quickly the merchant is notified of the mistake, the refund request may cancel the pending authorization.
If not, the mistaken charge and the refund will be processed as separate transactions, with a time-frame to resolution subject to the procedures of the card issuer. Some credit card issuers will place a pending authorization on an account, even when a transaction has been voided.
This could be caused by:. Some industries are allowed to place authorization holds before the final transaction amount is known. And oftentimes, the amount of the settled transaction is different than the amount that was held. Regardless of how difficult it can be to understand and comply with processing regulations, card brands expect you to do your part to maintain the integrity of their systems.
Authorization holds can be difficult to manage. There are several different mistakes that might be made. And different mistakes warrant different penalties. Some are fined; some lead to chargebacks. And you could receive a chargeback if the settled transaction amount is more than the authorized transaction amount. If you want the benefits of authorization holds without the drawbacks, you need to fully understand card brand regulations.
Check with your processor to make sure your workflows and data entry are compliant. For many merchants, authorization holds are a valuable chargeback prevention technique. But they are just one small piece of a bigger dispute management puzzle.
There are dozens of different prevention techniques , tools, and strategies to consider. At Midigator, we believe the challenge of running a business should be delivering great products or services, not managing payment risk. Let us remove the complexity of payment disputes so you can focus on growing your business. Contact Midigator today. For nearly a decade, Jessica Velasco has been a thought leader in the payment dispute industry.
She aims to provide readers with valuable, easy-to-understand resources. Midigator is a technology company dedicated to removing the complexity of payment disputes. We believe the challenge of running a business should be delivering great products or services, not managing payment risk. Midigator helps your business get back to business.
Request a Demo. What are the Benefits of Authorization Holds? What are the Drawbacks of Authorization Holds? Incorporating Holds Into the Authorization Process. The process works like this: A cardholder uses a credit or debit card to make a purchase. When you are ready, you submit the transaction for settlement. Your account is credited for the final transaction amount.
The duration of a hold varies. Why Use Authorization Holds? For example: Hotel guests might order room service or extend their stay. Rentals for cars, bikes, equipment, etc. Cruise lines offer excursions and in-transit services. Restaurant and bar employees often receive tips. Data has to be consistent, complete, and accurate.
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