What is an Authorization Hold?

As the name implies, an authorization hold allows a merchant to place a hold on some of the funds in a cardholder’s account. This is done to temporarily reserve an amount of money in the account to ensure that the merchant gets paid for services rendered. An authorization hold can also be known as a card authorization, pre-authorization, or pre-auth.

Before a merchant can complete a card sale, they must seek authorization from the cardholder’s issuing bank. The authorization doesn’t charge the card; that only occurs once the merchant submits the transaction for settlement. Instead, the authorization request simply ensures that the cardholder has enough funds in the account to cover the cost of the sale.

Of course, there are some situations in which a merchant may not know the final cost of a transaction at the time they seeks authorization; for instance, at a gas pump, or a hotel. These are situations in which an authorization hold will come in handy.

How Does an Authorization Hold Work?

As gas pump are among the most common uses of pre-auths, let’s examine the typical process in this situation:

1. The cardholder swipes a payment card at a gas pump.
2. The issuing bank automatically puts a hold on a predetermined amount of funds or available credit.
3. After the sale, the merchant submits the transaction for settling.
4. The temporary hold is released.
5. The final cost of the purchase is transferred from the customer’s account to the merchant.

We tend to think of payment card transactions as instantaneous. In reality, though, the authorization, batching, and settling of transactions could take several days. This is why the pre-auth is useful; otherwise, you might have a scenario in which a cardholder makes a purchase, then clears out the account, effectively stealing from the merchant.

It’s important to remember, though, that placing a hold on a cardholder’s account will temporarily reduce the available credit limit (for a credit card) or available funds (for a debit card). Thus, merchants should remove the hold as soon as possible once the transaction in question in submitted for settling.

When Authorization Holds Go Wrong

It’s important to understand the time limits associated with authorization holds. This will be based on the business’s merchant classification code (MCC), as well as on the card type. Most debit transactions, for instance, have a maximum hold time of one to eight business days. With credit transactions, though, the hold might last as long as a month.

If a transaction isn’t settled within the allowed time frame, the merchant may need to rescan the card, which is likely not possible. There are also misuse fees assessed by the card networks for delayed authorization holds.

There’s also the possibility that the cardholder will forget about a delayed transaction settling. If a buyer can’t recognize the initial transaction, that individual is more likely to contact his or her issuing bank to request a chargeback. This could also result in reputational damage if the cardholder shares their negative experience with other buyers.

The bottom line: merchants should take advantage of authorization holds when appropriate. They are a legitimate and useful practice to facilitate transactions that are authorized before the merchant may know the final transaction value. However, they should be utilized carefully, and always in accordance with best practices. Otherwise, an authorization hold could become a source of greater risk.