The use of authorization holds is a standard process in many industries. This useful tool will benefit most merchants who accept credit cards.
Before making payments, authorization holds are used to validate finances. This could prevent chargebacks as well. Businesses in the United States should explore all possible prevention methods, including authorization holds, in light of the ongoing issue of chargebacks.
In this article, you will learn what these types of holds are, how they work, and why you should use them.
What Are Authorization Holds?
Payment authorization holds are a payment processing technique used to verify that money is in a bank account or on a credit card. The “hold” approach assures that money is saved for future payments by placing a “hold” on the funds. This procedure stops companies from providing services or products to consumers who are unable to pay.
Holds are commonly used in everyday business. One example of this is when gas stations place holds on your credit or debit cards before you can pump gas into your vehicle. By holding your account, they ensure that you’ll have enough cash to pay your gas bill. However, these holds aren’t always used for immediate transactions. They are commonly used as well by hotels and car rental companies.
What Are the Benefits of Using Authorization Holds?
Depending on the industry, the main purpose for holding customer’s funds. For instance, these holds are commonly used by hotels, petrol stations, car rental agencies, and a number of other businesses to put money aside for future transactions, as this prevents customers from claiming that they lack the funds to complete the purchase. A hold acts as an insurance policy for the merchant in this case.
There are two key reasons for the increased popularity of Authorization holds:
- Chargeback Prevention: You can use an authorization hold to delay the completion of a transaction to minimize the risk of a chargeback impacting your merchant account. Refund requests can be released instead of facing a chargeback or processing a refund.
- Fraud Protection: If a firm works in a high-risk industry, it may place an authorization hold on the card while conducting further fraud checks. This is a useful tool for businesses who sell items that are frequently sought after by credit card scammers.
What Is the Process for Authorization Holds?
Authorization holds contact the customer’s bank or credit card issuer to determine whether funds are available. The funds are subsequently placed on hold, making them unavailable for future transactions. If a credit card has a $10,000 limit and a $2000 hold is placed on it, the cardholder will only be able to use the remaining $8000. Authorization holds on debit cards function in a similar manner.
After the business determines that the authorization hold is no longer required, the funds are released and can be used again. As an example, if a person rents a car, the rental car company may place a hold on your funds to protect itself from charges for damages, excessive mileage, or other fees. In order for the payments to be released, the renter must return the vehicle without incurring any additional costs. This allows the cardholder to access previously frozen funds.
How Long Does a Credit Card Authorization Hold Last?
Several factors determine the duration of an authorization hold. Your merchant category code (MCC), payment card type, and card network all play a part. Most debit card transactions are held for one to eight business days. However, the hold may extend up to a month for credit card transactions.
The card networks acknowledge that this can cause issues for both cardholders and retailers. Their rules strike a delicate balance. They want to offer you ample time to settle the account while holding the customer’s fund for as little time as possible.
Advantages and Disadvantages of Authorization Holds
Whether you’re thinking about using authorization holds to prevent chargebacks or remove fraud threats, it’s important to know the benefits and drawbacks that come with them. Highlighted below are the upsides and downsides of using these holds:
- Protect merchants: When a debit cardholder purchases a product with their debit card, the funds are not instantly deducted from their bank account; the transaction usually takes a few days to settle. A credit card transaction is the same. An authorization hold assures merchants that you have the finances to finalize the transaction even before settlement, and that the amount cannot be spent elsewhere.
- Notifies customers of account issues: Authorization holds can inform you of any problem with your account. If your card is declined during the authorization hold process, it could mean you need to verify your account balance. It’s also conceivable that fraudulent activity has been identified on your account, or your card was canceled. This means you’ll need to contact your card issuer. Although having a declined card might make you feel embarrassed, it can alert you to possible problems with your account and, in the case of a debit card, can even prevent overdraft fees.
- Transactions may still exist even if terminated: The authorization hold should be canceled when a transaction is canceled. If, however, a merchant fails to send a valid reversal message, an authorization hold may remain even after a transaction is canceled. Thus, the cardholder will not be able to access the funds until the hold is automatically released, which could take anywhere from one to eight days.
- It could end up being more than the ultimate sale price: When using an estimated authorization hold, the hold amount may end up being more than the final sale amount, limiting the cardholder’s available credit limit or funds unnecessarily.
You can now decide if authorization holds will be useful to your firm after understanding the various features of authorization holds. Look into them if your company has suffered from chargebacks, fraud, or other issues related to payments. If you have, get in touch with your card processor for more details.