In today’s digital world, money rapidly evolves from cash to cashless, and vice versal. According to the Federal Reserve Bank of San Francisco’s 2021 Diary of Consumer Payment Choice report, 45% of all payments were with a credit or debit card. As a result, merchants need to be extra diligent with security and ensure that customers who are presenting a card to make a payment have sufficient funds to do so. Thus, the introduction of the pre authorization charge.
The concept may be evident by name: ‘pre-authorized,’ but the actual process itself is more complicated and intricate. In this article, we will look into what exactly is a pre authorization charge, what they are used for, how pre authorized transactions work, what are their pros and cons. Finally, we also explain if there is a time limit to a preauthorization charge that a merchant processes.
What Is a Preauthorization Charge?
A preauthorization charge is when merchants place a reserve on the credit or debit card used for payment in the amount of the estimated future order that a customer is expected to pay. In this scenario, the issuing bank ensures that there are sufficient funds to process the payment. It places a hold on that amount in the credit card or the cash balance in an account in the event of a preauthorization debit.
The funds hold resulting from a preauthorization charge only temporarily freezes those funds from being used, effectively prioritizing the merchant which placed the preauthorization charge to be paid first.
For example, a preauthorized charge at a hotel is a hold placed on a customer’s credit or debit card for a specific amount of money, usually to cover the cost of the room, taxes, and any additional charges that may be incurred during the stay. This hold is placed before the customer arrives at the hotel and is often used as a guarantee for the reservation. The preauthorized charge is typically released after the customer checks out of the hotel and any additional charges have been processed.
There are a few things to keep in mind when it comes to hotel preauthorized charges:
- The amount of the hold may be higher than the actual cost of the room and any additional charges. This is because hotels often use a pre authorization charge on a customer’s card to cover any incidentals or unexpected expenses that may occur during the stay.
- The hold may appear on the customer’s credit or debit card statement as a pending transaction, but it will not actually be charged until the customer checks out of the hotel.
- If the customer wishes to use a different form of payment for the final bill, they should inform the hotel at the time of booking or at check-in. The hotel will then release the pre authorization charge on the original form of payment and process the final payment with the new method.
- If the customer cancels their reservation, the pre authorization charge should be released automatically. However, it’s always a good idea to check with the hotel to confirm that the hold has been removed.
What are Pre Authorization Charges used for?
Any activity requiring a security deposit is where preauthorization charges are often used. In essence, a pre-authorized charge is a guarantee for both merchant and the consumer. An insurance policy that ensures that the consumer is clear about the charges being incurred with a decent estimate of the overall costs. The merchant is ensured that their business is sufficiently covered for the various services the customer expects to procure.
There are a number of industries that use a pre authorization charge or holds as a way to guarantee a payment or secure a reservation. Some examples include:
Many car rental companies use a pre authorization charge on a customer’s credit or debit card when the customer reserves a vehicle. This hold is usually for the estimated total cost of the rental, including the base rate, taxes, and any additional charges that may be incurred during the rental period. The hold is typically released after the customer returns the vehicle and any additional charges have been processed.
Some airlines may use a pre authorization charge on a customer’s credit or debit card when the customer books a flight. This hold is usually for the total cost of the ticket, including taxes and fees. The hold is typically released after the customer completes the flight and any additional charges have been processed.
Cruise lines may use a pre authorization charge on a customer’s credit or debit card when the customer books a cruise. This hold is usually for the total cost of the cruise, including the base fare, taxes, fees, and any additional charges that may be incurred during the cruise. The hold is typically released after the customer returns from the cruise and any additional charges have been processed.
Many event ticketing companies use a pre authorization charge on a customer’s credit or debit card when the customer purchases tickets. This hold is usually for the total cost of the tickets, including any fees or taxes. The hold is typically released after the event has taken place and any additional charges have been processed.
How do preauthorized charges work?
The first step consists of choosing your preferred charging method in the online settings section of the merchant’s checkout software. This way, any transactions that go through your online store or website will have the ability to be a pre-authorized charge as opposed to a fully authorized one.
The second step is called ‘capturing funds’, and this is typically a function offered by the payment processor. This process can also be completed over the phone, pretty much the same way you would carry out a standard payment, however, in such an instance, it is important to make sure you explain the pre-authorization to your customer and explain how the funds will be reserved instead of being charged.
Merchants should have the appropriate options adjusted in their payment gateway so that they are able to activate the function that allows pre-authorization. However, it might be under the name reserve as it’s derived from the action of reserving the funds from the customer’s available balance. Once this has been properly set up, there shouldn’t be any issue in authorizing a transaction.
Is there a time limit to a pre authorized charge?
Yes, there is usually a time limit for a pre authorized charge. A pre authorized charge is an authorization given by the cardholder to the merchant to charge their credit or debit card for a certain amount at a later time. This authorization is typically valid for five days.
For hotels, a preauthorization charge is often used to hold a reservation or to secure a room rate. In this case, the pre authorized charge is usually released after the guest checks out of the hotel. However, the length of time for which the preauthorized charge is held may vary depending on the hotel’s policies and the payment processing system they use. Some hotels may hold preauthorized charges for a longer period of time, while others may release them more quickly.
Generally, fully authorized payment from your end has to be concluded and captured before the end of business hours on the fifth day, as typically, the pre-authorized funds are held in the customer’s account until this time period.
Once the five-day limit has lapsed, and the pre-authorization charge has expired, the funds are released, and the cardholder is free to use that balance as they please.
Are there benefits to a preauthorization charge?
Yes, there can be several benefits to a preauthorization charge. Here are a few examples:
- Hold a reservation: A preauthorized charge can be used by a hotel to hold a reservation or to secure a room rate. This can be especially useful if you are booking a room well in advance or if you are booking a room during a busy travel season.
- Protect against no-shows: A preauthorized charge can also help a business protect against no-shows, the event in which a guest or a renter of a vehicle makes a reservation but did not show up to claim their room or car. By obtaining a preauthorization charge, the merchant can ensure that they will receive payment even if the customer did not show up.
- Simplify the process: A pre authorized charge can also make the whole process simpler and more efficient, as the merchant will already have the necessary payment information on file. This can save time for both the customer and the merchant.
- Protect against fraud: A preauthorized charge can also help protect against fraud by ensuring that the hotel has the necessary payment information on file before the guest arrives. This can help prevent issues such as unauthorized charges or stolen credit card information.
Overall, a pre authorized charge can be a useful tool for many businesses to secure reservations and protect against fraud, while also simplifying the entire process for both customers and merchants.
The drawbacks of a pre authorized charge
There can be several disadvantages to a pre authorized charge, depending on the specifics of the charge and the merchant’s policies. Here are a few examples:
- Limited flexibility: A preauthorized charge can limit the flexibility to change travel plans or to cancel reservations. For example, if customers need to cancel their reservation or if they need to change the dates of their stay, companies may charge a cancellation fee or may not allow them to make the change at all.
- Limited funds: A preauthorized charge can also limit the number of funds available on the customer’s credit or debit card, as the charge will be held against the available balance until it is released. This can be an issue if customers need to use their cards for other expenses during their stay.
- Hidden fees: Some merchants may also charge additional fees that are not disclosed upfront, such as fees for amenities or services that were not requested. These fees can be added to your preauthorized charge, which may result in unexpected costs.
- Difficulty disputing charges: If customers have an issue with a pre authorized charge, such as an unauthorized charge or a billing error, it may be difficult to dispute the charge with the merchant or with your credit card issuer. This can be especially frustrating if isn’t a resolution while the services are being used.
Overall, it is important to carefully review the terms and conditions of a pre authorized charge and to clarify any questions or concerns among the parties well in advance. This can help with the potential risks and limitations of a preauthorized charge for both the merchant and the consumer.
Conclusion
Digital payments are becoming increasingly common worldwide. According to a report by World Bank, the use of digital payments has grown significantly in recent years, particularly in developing countries. Many people now use contactless payments to make purchases online, pay bills, and transfer money to others. Many factors contribute to the increasing popularity of digital payments, including the convenience of making payments from any device with an internet connection, the ability to make payments without carrying cash or credit cards, and the increased security of electronic payments compared to traditional methods.
In this environment of digital payments, the pre authorization charge is a modern-day solution for an ever-evolving and fast-changing digital marketplace where all transactions are slowly moving to cards and digital wallets. This service is increasingly useful for many industries, especially those where a security deposit is essential to ensure the safety and security of both the consumer and the merchant’s best interests.
Merchants typically have five days once a pre authorization charge has been applied, within which time you have to authorize the payment and close out the hold. There are many benefits to using a pre authorization charge, such as safety and security for the merchant, as well as an increase in customer satisfaction and a reduction in charges, such as refunds and processing fees.
[MF1]https://www.frbsf.org/cash/publications/fed-notes/2021/may/2021-findings-from-the-diary-of-consumer-payment-choice/
