An authorization hold is a brief hold placed on a portion of the funds or available credit in a cardholder’s account. This practice is commonly employed when the final total of a transaction is uncertain at the time of authorization, as seen at hotels or gas pumps.
Authorization serves as the bank’s confirmation that the customer possesses sufficient funds or credit for the intended purchase. If the authorization request is approved, the funds will eventually be received. However, this only occurs after the transaction is fully settled.
The actual transfer of funds takes place once you submit a batch of transactions to your acquiring bank. Even with regular batch submissions, it may take several days for the funds to reflect in your account. This timing could present potential issues.
Without an authorization hold, a cardholder could conceivably make a purchase and then immediately withdraw all the money from their account through an ATM, leaving you with an unpaid transaction. However, with a credit card authorization hold in effect, the cardholder cannot access the held funds, ensuring they remain reserved until settlement or until the time limit for the hold expires.
To grasp how pre-authorizations work, let’s walk through the card transaction process step by step:
- The customer swipes or dips their payment card.
- The cardholder’s issuing bank receives the authorization request.
- If the transaction is authorized, the bank temporarily places a hold on the transaction amount.
- You include the transaction in your next batch submission for settlement.
- The temporary hold is lifted, and the final purchase amount is transferred from the customer’s account to yours.
An authorization hold temporarily reduces the consumer’s available credit limit (for credit cards) or available funds (for debit cards). The held amount should be reasonable and aligned with the type of transaction being conducted.
Written by Andrii Vovk