By carlislemerchantservices April 26, 2025
An authorization hold, also known as a pre-authorization or card authorization, is a common practice in the world of banking and finance. It is a temporary hold placed on a customer’s account to ensure that sufficient funds are available for a transaction.
This article aims to provide a comprehensive understanding of what an authorization hold is, how it works, the different types of holds, and their implications. Additionally, we will explore common scenarios where authorization holds are applied, discuss the potential benefits and drawbacks, and address frequently asked questions about this topic.
Understanding the Concept of Authorization Holds
To grasp the concept of authorization-holds, it is essential to understand the fundamental principles behind them. When a customer makes a purchase using a debit or credit card, the merchant requests authorization from the cardholder’s bank to ensure that the funds are available. The bank then places a temporary hold on the funds, reserving them for the pending transaction. This hold ensures that the customer cannot spend the reserved funds elsewhere, preventing overdrafts or insufficient funds situations.
Authorization holds are particularly common in industries where the final transaction amount may vary, such as hotels, car rentals, and gas stations. These businesses often place a hold for an estimated amount, which is later adjusted to reflect the actual cost of the goods or services provided. This practice protects both the merchant and the customer, ensuring that the merchant receives payment for the transaction and the customer does not exceed their available funds.
How Authorization Holds Work: The Process Explained
The process of authorization-holds involves several parties, including the cardholder, the merchant, the acquiring bank, and the issuing bank. Let’s delve into each step of the process to gain a comprehensive understanding.
1. Customer initiates a transaction: The customer presents their card to the merchant and requests a purchase or service.
2. Merchant requests authorization: The merchant’s point-of-sale (POS) system sends a request for authorization to the acquiring bank, which acts as an intermediary between the merchant and the cardholder’s bank.
3. Acquiring bank forwards the request: The acquiring bank forwards the authorization request to the cardholder’s bank, also known as the issuing bank.
4. Issuing bank approves or declines: The issuing bank reviews the request and determines whether to approve or decline the transaction based on the available funds, credit limit, and other factors.
5. Authorization hold placed: If the issuing bank approves the transaction, it places a temporary hold on the funds in the cardholder’s account. The hold amount is typically the estimated total cost of the transaction.
6. Merchant completes the transaction: With the authorization obtained, the merchant proceeds to complete the transaction, providing the goods or services to the customer.
7. Settlement and release of funds: At the end of the day or a predetermined settlement period, the merchant submits a batch of authorized transactions to the acquiring bank for payment. The acquiring bank then transfers the funds to the merchant’s account, and the authorization hold is released.
Types of Authorization Holds and Their Implications
Authorization-holds can take various forms, each with its own implications for both the merchant and the customer. Let’s explore the different types of holds and their significance.
1. Merchant-specific holds: Some merchants may place a hold for a specific amount, often referred to as a flat hold. This type of hold is commonly seen in industries where the final transaction amount is known in advance, such as online retailers or subscription-based services. The advantage of a flat hold is that it provides certainty for both the merchant and the customer, as the exact amount is reserved.
2. Percentage-based holds: In certain industries, such as hotels or car rentals, where the final cost may vary, a percentage-based hold is often used. This type of hold reserves a percentage of the estimated total cost, ensuring that the customer has sufficient funds to cover the transaction. The actual amount charged may differ from the hold, but the percentage-based hold provides a safeguard against insufficient funds.
3. Time-based holds: Time-based holds are commonly used in scenarios where the final transaction amount is unknown, such as dining at a restaurant. In these cases, the hold remains in place for a specific period, typically until the merchant submits the final transaction amount for settlement. Time-based holds can be advantageous for customers as they allow for adjustments to the final amount, ensuring accurate billing.
Common Scenarios Where Authorization Holds are Applied
Authorization holds are applied in various situations to protect both merchants and customers. Let’s explore some common scenarios where authorization holds are commonly used.
1. Hotel reservations: When booking a hotel room, the hotel typically places an authorization-hold on the customer’s card to ensure that funds are available to cover the stay. The hold amount is often the estimated total cost of the reservation, including room charges, taxes, and any additional fees. Upon check-out, the actual charges are applied, and the hold is released.
2. Car rentals: Car rental companies commonly place authorization holds to cover potential damages, fuel charges, or additional fees. The hold amount is typically a percentage of the estimated rental cost, ensuring that the customer has sufficient funds to cover any potential expenses. Once the rental period ends, the final charges are applied, and the hold is released.
3. Gas stations: When using a debit or credit card at a gas station, an authorization hold is often placed to ensure that the customer has enough funds to cover the fuel purchase. The hold amount is typically a predetermined value, such as $100, and is released once the actual transaction amount is settled.
4. Restaurants: In the restaurant industry, authorization holds are commonly used to account for potential variations in the final bill. A hold is placed for the estimated total, including the cost of the meal, taxes, and gratuity. Once the customer’s card is charged with the actual amount, the hold is released.
Potential Benefits and Drawbacks of Authorization Holds
Authorization holds offer several benefits for both merchants and customers, but they also come with potential drawbacks. Let’s explore the advantages and disadvantages of this practice.
Benefits of Authorization Holds
1. Protection against insufficient funds: Authorization holds ensure that customers do not spend funds reserved for a specific transaction elsewhere, preventing overdrafts or declined payments.
2. Security for merchants: By placing an authorization hold, merchants can verify that the customer has sufficient funds or credit to cover the transaction, reducing the risk of non-payment or fraud.
3. Accurate billing: Authorization holds allow for adjustments to the final transaction amount, ensuring that customers are billed accurately and merchants receive payment for the goods or services provided.
Drawbacks of Authorization Holds
1. Temporary reduction in available funds: While the hold is in place, the reserved funds are unavailable for other purchases or transactions, potentially causing inconvenience for customers.
2. Delayed release of funds: In some cases, the release of an authorization hold may take longer than expected, tying up funds for an extended period. This delay can be frustrating for customers who need immediate access to their funds.
3. Potential for overdrafts: If customers are not aware of the authorization hold or do not account for it in their available balance, they may inadvertently spend more than they have, resulting in overdraft fees or declined transactions.
Frequently Asked Questions about Authorization Holds
Q1. What happens if the final transaction amount exceeds the authorization hold?
Answer: In cases where the final transaction amount exceeds the authorization hold, the customer’s card may be declined. It is essential for customers to ensure that they have sufficient funds or credit available to cover the entire transaction.
Q2. Can authorization holds be canceled or adjusted?
Answer: Authorization holds can be canceled or adjusted by the merchant or the issuing bank. However, the process and timeline for canceling or adjusting holds may vary depending on the policies of the involved parties.
Q3. How long do authorization holds typically last?
Answer: The duration of an authorization hold varies depending on the merchant and the type of transaction. Holds can last anywhere from a few hours to several days, depending on when the merchant settles the transaction and releases the hold.
Q4. Can authorization holds affect credit scores?
Answer: Authorization holds do not directly impact credit scores. However, if a hold results in a declined payment or overdraft, it may indirectly affect credit scores if it leads to late payment fees or negative marks on the customer’s credit report.
Q5. Are authorization holds the same as actual charges?
Answer: No, authorization holds are temporary holds placed on funds to ensure their availability for a specific transaction. Actual charges occur when the merchant settles the transaction and applies the final amount to the customer’s card.
Conclusion
Authorization holds play a crucial role in ensuring smooth and secure transactions in the banking and finance industry. By reserving funds temporarily, they protect both merchants and customers from insufficient funds situations and potential fraud.
Understanding the concept of authorization holds, how they work, and their implications is essential for anyone who regularly uses debit or credit cards for purchases. While there are potential benefits and drawbacks to this practice, authorization holds remain a valuable tool in maintaining the integrity of financial transactions.