Though authorization holds are only a standard procedure within a few industries, almost all merchants that accept credit cards can benefit from them. Putting an authorization hold on a transaction is one of the easiest and safest ways to reduce fees and avoid the potential hassle. Here’s how authorization holds work and why you should consider using them.
What Is an Authorization Hold?
An authorization hold is a temporary hold placed on some portion of funds in a cardholder’s account. It’s usually used when the total of the transaction isn’t known at the time of requesting authorization. At a gas station, for example, a customer swipes their card before pumping the gas, so you have to seek authorization before learning the total transaction cost.
Think of authorization as the issuing bank’s way of saying the customer has the necessary funds to complete the purchase. If the authorization is approved, you know you’ll eventually get those funds. As a merchant, you can use an authorization hold to lock in the funds you’re owed until the transaction is settled and the bank transfers the funds to you.
How Authorization Holds Work
When a customer uses a credit or debit card to buy something from you, you’ll communicate the full amount of the transaction to the issuing bank. If the customer doesn’t have enough funds to complete the purchase, the transaction will be declined. If they do have the funds available, you’ll place an authorization hold on their account for the full purchase amount.
The authorization hold will then remain in place until the transaction is complete or canceled. Authorization holds can last anywhere between a minute and a month. When that period ends, the hold will expire.
Why You Should Use Authorization Holds
Depending on the nature of your business, you may want to use authorization holds for different reasons. As mentioned above, many hotels, gas stations, and car rental providers use an authorization hold as an insurance policy. With the hold in place, there’s no way for your customers to claim they don’t have enough money to settle the transaction.
In other industries, the main purpose of using authorization holds is added fraud protection. If your business is a frequent target of fraud, placing an authorization hold while you’re performing other security checks can be a very helpful tool for fighting fraud.
Authorization holds can also help merchants with chargeback protection. If you can’t risk having chargebacks damage your merchant account, you can delay a transaction’s completion by placing an authorization hold on it. That way, if a customer requests a refund, you can release the hold rather than have to process a refund or fight a chargeback.