by Ben Dwyer Authorization holds, or “pre-auths” are common in certain industries.
You’ve probably experienced them at the gas station and when checking into a hotel. They serve a purpose, but can come with hidden costs that business owners need to know about.
What is a “pre-auth?”
A pre-auth (pre-authorization hold) is a temporary “hold” on an amount of the customer’s money when they use a credit card to pay for a transaction where the total amount is not known up front. The pre-authorization doesn’t actually charge the customer, but it does reserve funds to ensure that they have enough available to cover the (assumed) amount of the transaction. Once the real amount is finalized, the business finalizes the transaction.
In some cases, businesses use a $0.00 “pre-auth” to confirm a card’s validity rather than reserve funds. This type of authorization is common for subscription businesses, especially ones that offer free trials before the subscription kicks in.
The Pre-Auth Process
Anyone who has used a credit card at a hotel or gas station has likely experienced a pre-auth hold. The customer uses their card and the business requests an authorization for a certain amount. At some gas stations, it may only be $1.00 and serve more to check the validity of the credit card than the actual amount of funds available. At other gas stations, the hold may be $50 or $100 to be sure they’re covered for the cost of the gas. Hotels may authorize for a set dollar amount (for example, $100) but often it’s for the full price of the customer’s stay, before any optional services the customer adds.
Once the business requests the pre-auth, the card issuer places the hold. It does not charge the customer, but does reduce their available balance by the amount of the hold. The pre-auth is removed when either 1) the business finalizes the actual charge, called capturing or batching or 2) a set amount of time passes and the hold is released. For credit cards, pre-auths that aren’t properly finalized will be released within 30 days.
Why Use Authorization Holds
Pre-auths solve a problem: unknown final payment amounts where it’s risky to wait until the end to get payment information. For example, when you check in to a hotel, the hotel knows the per-night cost of your room and can calculate that amount for your trip. However, they don’t know if you will charge additional costs to your room during your stay. Things like room service, valet parking, purchases from the minibar, or amenities like spa services can all increase your total cost. But the hotel doesn’t want to just wait until the end to request payment information, as some less honest customers could easily skip out on the bill.
Gas stations also don’t know how much gas you’re going to pump and subsequently may impose pre-authorizations to cover common amounts. This helps prevent pumping gas and driving away without paying, either on purpose or out of forgetfulness.
Car rentals are another industry that commonly uses pre-authorizations. It ensures that they have enough reserved to cover any damages, toll charges, etc. and that the person doesn’t just leave with the car and not return it.
What to Look for as a Business Owner
If you’re a business owner in an industry where holds are common, you know they can be a great way to help protect yourself. But there are also costs to be aware of. There are a few possible pitfalls:
Interchange and Assessment Costs
If a hold isn’t appropriately finalized, the transaction may downgrade to a more expensive interchange category. The card brands consider finalizing pre-auths appropriately to be one of the criteria for target interchange categories. There can also be additional assessment fees on top of that. In fact, Mastercard has a Processing Integrity Fee that can apply to improperly settled pre-authorizations.
Pre-authorizations typically have to be finalized within 7 days, but there are some longer windows for lodging.
Potential for Chargebacks
Pre-authorizations show up on a customer’s account. With more consumers than ever checking their credit transactions online in real-time, they may see the pre-authorization hold and the actual charge. This can cause confusion and the potential for the customer to attempt to initiate a chargeback on one of the charges, thinking it’s a double-charge.
You can mitigate this by ensuring clear communication in advance with customers. Posting signage, including it on any rental agreements, and verbally confirming at the time of booking can all go a long way to keeping customers informed. The wording doesn’t have to be fancy. Simply tell the customer, “We’ll place a temporary hold of $X on your card, but your card won’t be charged until you return the rental / check out / etc.”
Avoiding Downgrades
The easiest way to avoid downgrades and customer confusion is to properly handle all pre-authorizations. Only use them when necessary, such as when you’re in an industry that relies on temporarily reserving the funds. If the customer doesn’t go through with a purchase or stay, be sure to void or reverse unused pre-authorizations to avoid fees for not finalizing them.
It’s also a good idea to consider industry-specific software or POS systems to ensure that transaction processing is set up correctly. If your equipment allows it, consider enabling an auto-capture function that will capture or finalize pre-authorized transactions at a set time or after a delay that you specify. This won’t require you to manually request settlement later.
If you prefer not to use auto-capture (or it’s not available on your machine) be sure to have a routine with a set time to make finalizing holds a part of end-of-day closing procedures at front desks or rental counters.
Authorization holds are helpful tools for certain industries. When done correctly, they reduce the risk of not being paid for services or goods. But if handled incorrectly, they can cost you more and annoy your customers.
Your goal is to use pre-auths effectively, so they help your business without costing more. Audit how your business uses authorization holds and make sure your equipment (and your staff) are set up to finalize promptly.
Do you use pre-authorizations at your business? How do your customers react? Let us know in the comments!
