Credit Card Authorization Hold - How and When to Use
Table of Contents
- What is an authorization hold?
- When should you use a card authorization hold?
- How long can an authorization hold last?
- What can go wrong with an authorization hold?
- How can authorization holds help prevent chargebacks?
- When can you remove an authorization hold?
- How long do pending authorizations take?
- Can a cardholder cancel a pre-authorized payment?
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.
Can 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.
What is an authorization hold?
The amount of the hold is made unavailable to the cardholder, but it isn’t transferred to the merchant’s account.
When the transaction is finalized, the hold will be lifted and the cardholder is charged the actual, final purchase amount. 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.
When should you use a card authorization hold?
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.
Authorization holds can also allow merchants to delay processing a transaction without worrying about whether or not it will go through. Merchants wouldn't usually want to ship out a purchase before they've been paid for it, but using an authorization hold limits the risk of doing so, giving merchants an extended window to prevent fraud or customer dissatisfaction before chargebacks enter the equation.
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 targeted 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 chargeback 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 issuing a refund or being hit with a chargeback.
How long can an authorization hold last?
If you don’t finalize a transaction within the allowed time frame, 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 time limit 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, talk to your acquirer or payment processor to make sure you’re following the rules that apply to your MCC.
What can go wrong with an authorization hold?
One word of warning: In some cases, cardholders can file chargebacks related to merchant misuse of 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 time frame. 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 clearly recognize this.
In order to avoid causing problems for customers, merchants should submit authorization reversals as soon as possible when an order is cancelled. Normally an authorization hold stays in place until the transaction is processed or until it expires, but if the former isn't going to happen, it's better to process an authorization reversal than to wait until time runs out.
How can authorization holds help prevent chargebacks?
When a cardholder notices an fraudulent charge on their account, they almost always contact their bank instead of the merchant, leading to a chargeback that the merchant can't fight. If the charge is instead a hold, however, there won't be a chargeback.
When a cardholder contacts their bank to dispute an authorization hold, the bank will simply contact the merchant and ask them to remove it.
Authorization holds can also be used to help identify fraud before processing a transaction. Fraud prevention tools can be used to red flag large or suspicious transactions and send them for manual review. If no one is available to immediately review the transaction, an authorization hold can give the merchant time to take a closer look without the risk of losing a potential sale.
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 would otherwise feed into a high chargeback rate.
Some markets are more prone to fraud, some products are subject to high rates of customer dissatisfaction 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.