What is a pre-authorization charge?

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April 6, 2023
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What is a pre-authorization charge?

Pre-authorization charges are an effective way for businesses of all sizes to guarantee payments – especially for companies selling high-risk products, offering long shipping periods, or those looking to reduce the cost of fraud and chargebacks.

So, what is a pre-authorization charge? And how do they work? This article will explain everything you need to know, including the key benefits, and information on how to integrate your business with pre-authorization tools.

What is a pre-authorization charge?

A pre-authorization charge, also known as a pre-auth or authorization hold, is a temporary hold placed on a customer’s payment card. It’s used to verify that the account is valid and has sufficient funds to cover a pending transaction, without actually debiting the cardholder’s account upfront.

The hold typically lasts around five days, but it can last up to 31 days, depending on the merchant. In monetary figures, the hold can range from a few dollars to the total amount of the transaction, depending on the merchant's policies.

During the pre-authorization period, the funds aren’t actually transferred to the merchant. Instead, they’re set aside in a temporary reserve, and can’t be spent by the customer until the pre-authorization hold is released.

Pre-authorization gives you, the merchant, priority over a particular sum of money in the customer’s account. Once the transaction is completed, the hold is removed, and the actual charge is processed.

However, if your business doesn't follow up with an official confirmation of the pre-authorized transaction within the holding period, the issuing bank may release the on-hold funds back to the customer, nullifying the transaction. These expired transactions are known as “falling off”.

How long can a pre-authorization charge hold?

Pre-authorization charges typically last five days – if no further action is taken by the merchant, but it can last up to 31 days depending on the Merchant Classification Code (MCC). Depending on your MCC, you can release the hold as soon as the transaction is completed, or you can hold the funds for a longer period of time – from several days up to a month.

There are circumstances where pre-auths will need to be longer, such as long-term car rentals or Airbnb stays. If your business is regularly processing pre-auths for periods longer than five days, we recommend arranging with your credit card processor to reassess your MCC.

The exact length of time for a pre-authorization charge also depends on the type of transaction, the amount of the transaction, and the policies of the card issuer. For example, hotels and car rental companies may place a pre-authorization hold for a longer period of time to cover potential damages or additional fees.

Learn more: Merchant category codes

Benefits of a pre-authorization

Pre-authorization charges offer several benefits to businesses, particularly for secure online payments, including:

Avoid chargebacks and refund fees

Chargebacks happen when customers dispute a transaction with their bank, which requires the merchant to provide evidence of the transaction's validity. If the merchant loses the dispute, they’re charged – usually between $25 to $50 per chargeback.

By pre-authorizing the payment, your business can ensure the customer can actually cover the transaction, reducing the likelihood of chargebacks and refund fees.

Ensures payment for the service

Pre-authorization charges help guarantee that customers are committed to paying for the service or product. By obtaining authorization for the payment upfront, your business can reduce the risk of non-payment or default, which can be especially helpful for businesses with high costs or offering long-term service contracts, such as hotels or car rental companies.

Reduce fraud

By verifying the customer's payment information, and ensuring that the transaction is legitimate before providing the service or product, your business can reduce the risk of fraudulent transactions and chargebacks.

Cut costs

By verifying payment information beforehand, you can also reduce the likelihood of declined transactions and associated fees. For example, you won’t be charged interchange fees if the transaction gets canceled because, with pre-auths, you only pay interchange fees when the transaction is finalized. Instead, you might only have to pay the payment gateway fee.

Improve the customer experience

Pre-authorization charges can also create a more seamless payment process. First off, by using an authorization hold, you can prevent customers from paying for goods that you’ve already run out of, which should improve customer satisfaction.

Second, your business can reduce the need for customers to provide payment information multiple times, which can be frustrating and time-consuming. Lastly, pre-authorization can help you provide a more accurate estimate of the final cost of the service or product, reducing the likelihood of surprises or unexpected charges.

Best businesses for pre-authorization use

Pre-authorization charges are particularly beneficial for businesses selling high-risk products, offering long shipment periods, or want to avoid chargebacks. Specifically, we recommend pre-authorization holds for hotels, car rental services, gas providers, and ecommerce businesses.

This is how pre-authorization can help those types of businesses…

Hotels, Airbnb, hospitality

Pre-authorizations are extremely common in the hospitality industry, guaranteeing that funds are available in case of additional charges, such as cleaning, room service, or damages to the room.

It can also help to streamline the check-in process, removing the need for hotel owners or Airbnb hosts to manually process additional payments.

Ecommerce businesses

Authorization holds are ideal for ecommerce businesses that manage inventory or provide long shipping periods. Pre-authorization can also improve customer satisfaction by protecting against delayed or incorrect deliveries, instead of charging the customer only when the products have been successfully delivered. This should ensure payments, reduce the risk of chargebacks, and improve the customer experience – all in one.

Car rental services

Car rental is a high-risk service, which is why pre-authorization is particularly beneficial. These charges ensure the customer has sufficient funds to cover any costly damages to vehicles, but it also covers the estimated rental charges and possible additional fees like tolls and fuel charges.

Once the rental period is over and the vehicle is successfully returned to your business, the funds that were on hold are released.

Accept payments online with Checkout.com's Unified Payments API

If you want to start pre-authorizing payments for your business, get started with our Unified Payments API. With this customizable and user-friendly tool, you can get faster, more reliable payments, and provide a frictionless payment experience for your customers – all in one place.

Best of all, our API can process a number of different authorization types, whether you want to give your customers an estimated figure, a finalized amount, or incremental increases for the payment.

Learn more: A guide to payment optimization

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April 6, 2023 5:17
April 6, 2023 5:21