Credit Card Authorization Hold - How and When to Use
Credit card authorization holds can be a powerful tool for merchants, but only a few industries seem to fully realize this. When you check into a hotel, the clerk puts a hold on your card in case you raid the minibar or spend all night placing long-distance phone calls. At gas stations, the card reader places a hold before it lets you start pumping, to make sure you can’t pump out fifty gallons of premium unleaded before somebody realizes you don’t have the funds to cover it. Could authorization holds be used to protect merchants in other ways—like preventing chargebacks?
The authorization process is an essential step in completing a credit card transaction. During authorization, the payment processor receives the cardholder’s information and communicates with the issuing bank to verify that the card is valid and that the cardholder has sufficient funds to cover the amount of the transaction. Most merchants proceed immediately from authorization to the completion of the transaction, but they have the option to place an authorization hold instead.
An authorization hold effectively “reserves” a certain amount of the cardholder’s available funds for the merchant upon completion of the transaction. The amount of the hold is made unavailable to the cardholder, but it isn’t transferred to the merchant’s account—not yet. When the transaction is finalized, the hold will be lifted and the cardholder is charged the actual, final purchase amount. Only then can settlement happen, the merchant gets their funds. The cardholder will likely only notice the hold if they check their statement or max out their card, although sometimes holds may stay in place for a few business days.
Why Should You Use Card Authorization Holds?
The usefulness of authorization holds for lodging and fuel merchants is obvious—the final purchase price of a hospitality stay or fill-up can be variable and hard to predict. Authorization holds allow them to make sure that a customer can cover a purchase even if it ends up on the high end of the spectrum.
The fact that card authorization holds create a period of time where a transaction has been initiated but not completed presents merchants with an opportunity to detect and prevent fraud and potential dispute issues. By using this window of time effectively, merchants can avoid processing fraudulent transactions and resolve customer conflicts before they have the chance to become a chargeback.
Here’s one important fact about card authorization holds—they can’t be disputed. They either turn into completed transactions (which can then be disputed), or they expire.
Merchants in some ecommerce sectors are targeted by fraudsters at a higher rate than average. Stolen cards quickly become worthless once the cardholder realizes what’s going on, so fraudsters often try to make their attempts count by purchasing items with a high resale value.
Merchants who find themselves being used in this way can use card authorization holds on potentially risky transactions to give cardholders more time to discover that their cards are being used fraudulently before any real money changes hands. If the cardholder contacts the merchant while the hold is in place to tell them that their card was stolen, the merchant can simply release the hold and cancel the order—no chargebacks necessary.
Merchants whose products are subject to frequent returns or “product not as described” chargebacks may wish to use card authorization holds to delay finalizing transactions until after the product has been received. If buyer’s remorse kicks in right away, the merchant can just lift the hold instead of processing a refund—or giving the customer the chance to file a dispute with their bank.
How Long Can a Card Authorization Hold Last?
The permitted length of a card authorization hold depends on the nature of the transaction. The Merchant Category Code that accompanies your transactions will largely determine how long your holds can last.
If you don’t finalize a transaction within the allowed timeframe, you may be required to start the transaction over (with the cooperation of the customer) and pay a “misuse fee” to the card network.
For the majority of card-not-present merchants in an ecommerce environment, the maximum length of a card authorization hold is seven days. For recurring transactions, the timeframe may be as short as one day. Merchants whose business is hospitality, vehicle or equipment rental, or related services may be allowed as many as 31 calendar days.
If you’re planning to start using card authorization holds, inquire with your acquirer or payment processor to make sure you’re following the rules pertaining to your MCC.
Sounds Good—What Could Go Wrong?
One word of warning: while card authorization holds cannot be disputed, cardholders can file chargebacks for specific reasons related to merchant misuse of card authorization holds. These can involve charges exceeding an authorization amount, failure to comply with the card network’s authorization rules, and other issues.
Changing the way your business handles authorizations can expose you to authorization-related chargebacks. Make sure you and your staff are following the rules, obtaining all required authorizations, and finalizing transactions within the permitted timeframe. Remember, the point of making elective use of card authorization holds is to avoid disputes and chargebacks, not to mislead or upsell your customers—make sure your policies and procedures clearly recognize this.
Merchants who sell tangible products at fixed prices may have long thought that card authorization holds weren’t really meant for them, and many merchants can probably get by just fine without them. However, they can be a highly effective tool in certain situations that can otherwise feed into a high chargeback rate. Some markets are more prone to fraud, some products are subject to high rates of consumer frustration despite the merchant’s best efforts to educate them, and in cases like these holds can be an excellent remedy where few others exist.
Another way to make card authorization holds part of a strong chargeback defense strategy is to work with an experienced chargeback management firm like Chargeback Gurus. Beating chargebacks always requires a multi-pronged approach, and a team of experts can help you implement a new authorization processes while keeping you in full compliance with the rules of the big card networks.