What is an Authorization Hold? Why Do Companies Use it?

In today’s fast-paced digital world, where online transactions have become the norm, it’s essential for businesses to ensure secure and efficient payment processes. One crucial tool used by companies across various industries is the authorization hold.

This practice, also known as a pre-authorization or card hold, involves temporarily reserving a specific amount of money on a customer’s payment card before a transaction is finalized. But what exactly is an authorization hold, and why do companies rely on it? In this article, we will delve into the concept of authorization holds, exploring its purpose, benefits, and why businesses find it indispensable in managing transactions effectively. By understanding the intricacies of authorization holds, you’ll gain valuable insights into the mechanisms that underpin modern payment systems.

What is Authorization Hold?

An authorization hold, also referred to as a pre-authorization or card hold, is a temporary hold placed on a customer’s payment card by a merchant or service provider. When a customer initiates a transaction, such as making a hotel reservation, renting a car, or ordering a product online, the merchant requests an authorization hold from the customer’s bank or card issuer. The hold reserves a specific amount of funds, typically the estimated total of the transaction, on the customer’s card for a predetermined period.

The purpose of an authorization hold is to verify the availability of funds and ensure the customer’s ability to pay for the goods or services. It serves as a guarantee for the merchant that the customer has sufficient funds or credit limit to cover the transaction. During the hold period, the reserved funds are unavailable to the customer, although they are not yet transferred to the merchant. Once the transaction is completed, the hold is typically released, and the actual payment is processed, either fully or partially, depending on the final amount.

Authorization holds are commonly used in industries such as hospitality, travel, car rentals, and e-commerce, where payments are made in advance or require confirmation of payment capacity. This practice helps businesses minimize the risk of fraudulent transactions, prevent overspending, and streamline the payment process by ensuring a secure and reliable payment method.

How Does Authorization Holds Work?

Authorization holds plays a crucial role in modern payment systems, ensuring secure and efficient transactions for businesses and customers alike. To understand how authorization holds work, let’s explore the process in more detail.

Initiation of a Transaction

The process begins when a customer initiates a transaction, such as making a hotel reservation, renting a car, or purchasing goods online. The customer provides their payment card details to the merchant or service provider.

Authorization Request

The merchant sends an authorization request to the customer’s bank or card issuer. This request includes the transaction details, such as the amount to be authorized, the merchant’s identification, and the customer’s card information.

Verification of Funds

Upon receiving the authorization request, the bank or card issuer verifies the availability of funds in the customer’s account or the credit limit on their card. They assess whether the customer has sufficient funds to cover the transaction.

Placement of the Hold

If the customer’s account or credit limit is deemed sufficient, the bank or card issuer places an authorization hold on the customer’s card for the specified amount. This hold reserves the funds for the merchant, ensuring they are available when the final payment is processed.

Temporary Deduction of Funds

While the authorization hold is in place, the reserved amount is temporarily deducted from the customer’s available balance or credit limit. This deduction serves as a safeguard against the customer spending the reserved amount elsewhere. However, the funds are not yet transferred to the merchant.

Hold Period

Authorization holds have a predetermined hold period, typically ranging from a few hours to several days, depending on the merchant and the type of transaction. During this period, the reserved funds remain in a pending state, inaccessible to the customer.

Finalization of the Transaction

Once the hold period elapses, the merchant finalizes the transaction. The final amount is determined, which may differ from the initially authorized amount due to adjustments or additional charges (e.g., taxes, fees, or incidental expenses).

Release of the Hold

After finalizing the transaction, the merchant sends a request to the customer’s bank or card issuer to release the authorization hold. The bank then returns the reserved funds to the customer’s available balance or credit limit.

Payment Processing

With the authorization hold released, payment processing takes place. Depending on the actual transaction details, the merchant charges the customer’s card for the final amount, either in full or partially. This payment is separate from the authorization hold and reflects the actual cost of the goods or services provided.

Completion of the Transaction

Once the payment is successfully processed, the transaction is considered complete. The customer’s account statement will show the finalized payment amount, and the merchant receives the funds for the goods or services rendered.

Authorization holds serve several purposes for businesses. Firstly, they help mitigate the risk of fraudulent transactions by verifying the customer’s payment method and ensuring sufficient funds or credit availability. They also protect businesses from potential losses in case of chargebacks or cancellations. Furthermore, authorization holds streamline the payment process by reserving the necessary funds in advance, enabling businesses to provide faster and more efficient customer services.

For customers, authorization holds provide peace of mind by assuring them that their chosen payment method is valid and can cover the transaction. Although the temporarily held funds are inaccessible during the hold period, they are not permanently deducted, allowing customers to use them for other purposes.

Overall, authorization holds are a vital component of modern payment systems. They establish a temporary reserve of funds on a customer’s card to ensure the availability of payment for a specific transaction. By verifying the customer’s ability to pay and securing the necessary funds, authorization holds enable businesses to operate smoothly and securely while providing customers with a seamless payment experience.

Why Should Businesses Use Authorization Holds?

There are several reasons why businesses should consider using authorization holds as part of their payment processes. Let’s explore the key benefits of implementing authorization holds:

Mitigating the Risk of Fraudulent Transactions

Authorization holds serve as a safeguard against potential fraudulent activities. By verifying the customer’s payment method and ensuring sufficient funds or credit limit, businesses can reduce the risk of accepting payments from unauthorized or compromised cards.

Ensuring Payment Capacity

Authorization holds provide assurance that customers have the necessary funds or credit availability to cover their transactions. This minimizes the chances of payment failures, declined transactions, or insufficient funds, which can lead to inconvenience, additional administrative work, and potential loss of sales.

Preventing Overspending

By reserving a specific amount on a customer’s payment card, authorization holds help prevent customers from overspending or exceeding their credit limits. This is particularly useful in industries where services are rendered in advance, such as hotel bookings or car rentals, ensuring that customers have the necessary funds available when they actually utilize the services.

Streamlining Payment Process

Authorization holds streamline the payment process by verifying the payment method and reserving funds in advance. This reduces the need for manual verification or follow-up after the transaction, making the payment process faster and more efficient for both businesses and customers.

Managing Chargebacks and Cancellations

Authorization holds provide a layer of protection for businesses in the event of chargebacks or cancellations. If a customer disputes a transaction or cancels their order, the held funds can be released back to the customer, minimizing potential financial losses for the business.

Enhancing Customer Satisfaction

By using authorization holds, businesses can ensure a seamless payment experience for their customers. Customers can feel confident that their chosen payment method is valid and that their transactions will be smoothly processed, reducing any potential frustration or inconvenience associated with payment issues.

Supporting High-Risk Transactions

In industries with higher risks of fraudulent activities or payment disputes, such as online gaming or digital services, authorization holds become even more crucial. They provide an additional layer of security and trust for both businesses and customers, enabling smoother and more secure transactions.

It’s important to note that while authorization holds offer numerous benefits, businesses should also be mindful of the hold period to avoid unnecessarily inconveniencing customers. Striking the right balance between holding funds for security purposes and minimizing customer impact is crucial for a positive payment experience.

Authorization holds offer a range of advantages for businesses, including risk mitigation, ensuring payment capacity, preventing overspending, streamlining the payment process, managing chargebacks, and enhancing customer satisfaction. By implementing authorization holds effectively, businesses can optimize their payment systems and provide a secure and efficient payment experience for their customers.

How Long Do Credit Card Authorizations Last?

The duration of credit card authorizations, also known as authorization holds, can vary depending on several factors. Generally, authorization holds have a predetermined time period set by the merchant or the card issuer. Here are some key points to consider regarding the duration of credit card authorizations:

Hold Period

The hold period for authorization can range from a few hours to several days. Common hold periods are typically 24-72 hours, but they can vary based on the merchant’s policies or industry standards. Some merchants may choose to release the hold earlier if the transaction is completed or canceled within a shorter timeframe.

Industry Practices

Different industries may have specific hold periods due to their unique nature of transactions. For example, hotel reservations often have longer hold periods to account for potential additional charges, while gas stations may have shorter hold periods due to the immediate nature of fuel purchases.

Merchant Policies

Merchants have the flexibility to determine the hold period for their transactions. They may consider factors such as the type of goods or services provided, the potential for returns or cancellations, and industry standards when setting the hold duration.

Card Issuer Regulations

Card issuers, such as banks or financial institutions, may also impose guidelines regarding authorization hold durations. These guidelines ensure consistency and standardization across transactions involving their issued credit cards.

Release of Authorization Holds

Once the hold period expires, the authorization hold is automatically released by the card issuer. However, it’s important to note that releasing the hold does not necessarily mean the funds will immediately be available in the customer’s account. The timing for the release of funds back to the customer’s available balance can depend on the card issuer’s policies and the processing time of the customer’s bank.

It’s worth mentioning that, in some cases, merchants may choose to void or cancel an authorization hold before the hold period ends. This can happen if the transaction is canceled, modified, or if the final payment amount differs significantly from the initially authorized amount.

Overall, the specific duration of credit card authorizations is influenced by various factors, including merchant policies, industry practices, and card issuer regulations. It’s advisable for customers to be aware of their card issuer’s policies and familiarize themselves with the hold periods for specific transactions to manage their finances better.

Pros and Cons of Authorization Hold

Authorization holds, also known as pre-authorizations or card holds, offer benefits and drawbacks for both businesses and customers. Let’s explore the pros and cons of authorization holds:

Pros

• Risk Mitigation: Authorization holds help businesses mitigate the risk of fraudulent transactions by verifying the customer’s payment method and ensuring sufficient funds or credit availability. This protects businesses from potential losses associated with accepting payments from unauthorized or compromised cards.
• Payment Assurance: By placing an authorization hold, businesses can ensure that customers have the necessary funds or credit limit to cover their transactions. This minimizes the chances of payment failures, declined transactions, or insufficient funds, reducing administrative work and potential loss of sales.
• Preventing Overspending: Authorization holds prevent customers from overspending or exceeding their credit limits by reserving a specific amount on their payment cards. This is particularly useful in industries where services are rendered in advance, ensuring that customers have the necessary funds available when they actually utilize the services.
• Streamlined Payment Process: Authorization holds streamline the payment process by verifying the payment method and reserving funds in advance. This reduces the need for manual verification or follow-up after the transaction, making the payment process faster and more efficient for both businesses and customers.
• Chargeback and Cancellation Management: Authorization holds provide a layer of protection for businesses in the event of chargebacks or cancellations. If a customer disputes a transaction or cancels their order, the held funds can be released back to the customer, minimizing potential financial losses for the business.

Cons

 

• Temporary Funds Deduction: Authorization holds temporarily deduct funds from a customer’s available balance or credit limit. This can limit the customer’s access to those funds during the hold period, potentially causing inconvenience or affecting their purchasing power.
• Inconsistent Hold Periods: The duration of authorization holds can vary across different merchants and industries. Customers may find it challenging to predict how long funds will be unavailable in their accounts, leading to potential frustration or confusion.
• Delayed Fund Availability: While the hold is released once the transaction is finalized, it may take additional time for the funds to be fully available to the customer. The timing for the release of funds back to the customer’s account can depend on the card issuer’s policies and the processing time of the customer’s bank.
• Over-Holds or Double Holds: Occasionally, technical glitches or errors in the payment processing system can lead to over-holds or double holds, where funds are reserved multiple times for the same transaction. This can cause inconvenience and confusion for customers, requiring manual intervention to resolve the issue.
• Potential Negative Customer Experience: In some cases, customers may find the hold period or the amount of funds being held excessive or unexpected. This can result in a negative customer experience, especially if they encounter difficulties accessing their funds during the hold period.

Overall, while authorization holds offer advantages such as risk mitigation, payment assurance, and streamlined payment processes, they can also have downsides such as temporary funds deduction and potential customer inconvenience. Businesses should carefully consider the impact on their customers and strike a balance between effective risk management and providing a positive payment experience.

How Do Authorization Holds Prevent Chargebacks?

Authorization holds play a significant role in preventing chargebacks, although they do not completely eliminate the possibility. Here’s how authorization holds contribute to chargeback prevention:

Verification of Payment Method

Authorization holds verify the validity of the customer’s payment method, ensuring that the card is not stolen or compromised. By reserving funds on the card, the hold confirms that the customer has the necessary financial resources or credit availability to cover the transaction.

Customer Verification

Authorization holds require customers to provide accurate and up-to-date payment card information, including card number, expiration date, and CVV code. This helps validate the customer’s identity and reduces the likelihood of fraudulent transactions.

Funds Availability Check

By placing an authorization hold, businesses can ensure the customer has sufficient funds or credit limit to cover the transaction. This minimizes the risk of chargebacks due to insufficient funds or over-the-limit situations.

Customer Agreement

Authorization holds often require customers to acknowledge and agree to the temporary reservation of funds. This agreement helps establish clear communication and understanding between the business and the customer regarding the payment process, reducing the likelihood of chargeback disputes based on misunderstanding or confusion.

Reduced “Friendly” Fraud

Authorization holds act as a deterrent to “friendly” fraud, where a customer intentionally initiates a chargeback despite receiving the product or service. The hold indicates that the customer authorized the transaction and agreed to the reservation of funds, making it more difficult for them to dispute the charge without legitimate grounds.

While authorization holds are an effective measure for chargeback prevention, they are not foolproof. Some chargebacks may still occur due to reasons such as dissatisfaction with the product or service, delivery issues, or fraudulent claims. However, the use of authorization holds significantly reduces the risk of chargebacks resulting from insufficient funds, stolen cards, or intentional fraud.

Businesses need to implement additional measures to minimize further chargebacks, such as maintaining clear records of transactions, providing excellent customer service, offering refunds or exchanges as appropriate, and addressing customer concerns promptly. By combining authorization holds with comprehensive chargeback management strategies, businesses can significantly reduce their exposure to chargebacks and the associated financial losses.

Final Words

In conclusion, authorization holds are vital in modern payment systems, offering benefits for both businesses and customers. They serve as a protective measure against fraudulent transactions, verify payment methods, ensure sufficient funds or credit availability, and streamline the payment process. Authorization holds help mitigate the risk of chargebacks by validating customer information, confirming the availability of funds, and acting as evidence in dispute resolution. While they are not a foolproof solution and can present temporary inconveniences, their implementation significantly reduces the likelihood of chargebacks and provides a more secure and efficient payment experience. Businesses should carefully balance the use of authorization holds with the need to provide a positive customer experience and supplement them with additional chargeback prevention strategies to safeguard their operations further. Overall, authorization holds contribute to the integrity of payment transactions and foster trust between businesses and their customers.

Frequently Asked Questions (FAQs)

How long do authorization holds typically last?

The duration of authorization holds can vary. Hold periods are often set by the merchant or the card issuer and can range from a few hours to several days. The specific hold period depends on factors such as industry practices, merchant policies, and card issuer regulations.

Can authorization holds be released before the hold period ends?

Yes, in some cases, authorization holds can be released before the hold period expires. If a transaction is canceled, modified, or if the final payment amount differs significantly from the initially authorized amount, a merchant may choose to void or cancel the hold early.

Do authorization holds deduct funds from a customer’s account?

Authorization holds temporarily deduct funds from a customer’s available balance or credit limit. However, these funds are not yet transferred to the merchant. The purpose of the hold is to reserve the funds for the transaction, ensuring they are available when the final payment is processed.

Are authorization holds the same as actual charges?

No, authorization holds are not the same as actual charges. Holds reserve funds for the transaction, while actual charges reflect the final amount to be paid. The hold is released once the transaction is finalized and the payment is processed separately.