Authorization holds are a useful tool in the card processing toolbox to ensure sufficient funds are available when you’re ready to process the transaction. Authorization hold locks act as a security measure by temporarily freezing funds in a customer’s account during the authorization process. For some industries, authorization holds are standard procedure. Authorization holds are a valuable tool for merchants to manage risk and ensure payment. The hold is placed on a cardholder’s account, and their bank reserves the transaction amount. Cardholders can’t spend the amount of the hold, but merchants also haven’t yet finalized the transaction.
Below we explore in more detail what an authorization hold is, what it’s used for, and how you can use it to prevent fraud.
The authorization process involves several steps, including placing a hold on funds during payment card transactions and bank transfers. Authorization holds are used in payment card transactions and bank transfers to temporarily hold funds before the transaction is finalized. The “hold funds” concept means the hold temporarily reserves the funds in the cardholder’s account.
Authorization holds can help prevent chargebacks by allowing merchants to delay processing the transaction until they are certain the transaction is legitimate.
What Is a Credit or Debit Card Authorization Hold?
When a customer puts their credit or debit card down for a transaction, an authorization hold puts a temporary hold on the funds in the customer’s account but doesn’t actually process the transaction. The authorization amount is the specific sum reserved during this process. In a credit or debit transaction, for example, if your customer has a $3,000 credit card limit, and the authorization hold is for $300, that $300 is a fixed amount held until the transaction is settled, leaving them with access to $2,700 of their credit limit.
Authorization holds go by a few names in the industry, including purchase authorization or temporary authorization. There are a few reasons merchants would want to use authorization holds:
In some industries, such as hotels or gas stations, the final amount of the transaction may differ from the initial hold, so the authorization hold ensures funds are available until the true cost is finalized.
Issues with authorization holds commonly occur when there is a discrepancy between the hold amount and the final transaction amount, particularly for customers with low credit limits.
To ensure the customer has sufficient funds
If you’re selling tickets to an event, for example, you want to ensure the customer has the funds to cover the purchase before you go ahead and sell them the ticket.
To protect against fraud
By holding onto the funds until the transaction is complete, you can help prevent fraudsters from using stolen card information to make a purchase and then disappearing before you can process the transaction.
To hold a reservation
If you’re a hotel or rental car company, you may want to place an authorization hold on a customer’s card to ensure hotel guests have the funds to cover potential incidentals. Hotels typically hold the room rate plus a daily amount, often between $50 and $200, to cover potential incidentals.
Holds ensure that the customer has the necessary available funds for the purchase. Merchants guarantee they’ll receive payment for their goods or services. For car rentals, authorization holds are often employed by rental agencies to cover the rental fee, insurance, and a security deposit for potential damages, such as excessive mileage. And if the customer tries to cancel the transaction or dispute it later, there is an available balance to complete a reversal. Assuming it is appropriate based on the business’s cancelation/returns policy.
Authorization holds can also be used to reserve funds for future purchases or additional services that may be incurred during a stay or rental.
Key takeaways
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An authorization hold is a tool used by merchants to ensure that customers have an available balance to cover their purchases.
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It’s a way to protect against fraud and hold reservations.
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Merchants can guarantee they’ll receive payment for their goods or services, and if the customer later tries to cancel or dispute the transaction, the funds will still be available.
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Authorization holds are standard procedure in certain industries, such as hotels and rental cars, but can be applied to many more.
How Do Authorization Holds Work?
With every transaction process, there are a lot of moving pieces that go on behind the scenes. In many cases, these are automatic. Your payment processor is doing all of this in the background. But it’s still worth understanding the steps to work out where the authorization hold fits in. The authorization process involves several steps and can vary depending on the transaction type, such as card-present or card-not-present transactions.
The first step is, of course, the customer initiates the purchase with their card. This can be done in person or online, and it may involve different types of cards, including debit cards.
Then, the merchant contacts their acquirer (e.g. the bank that handles their payment processing) and submits what’s called an authorization request. This request includes the customer’s account information, the authorized amount, and sometimes additional information like the customer’s zip code.
Please note “contacting the acquirer” does not mean that merchants have to physically pick up the phone and contact their acquirer every time they want to process a transaction. In many cases, the authorization request is submitted automatically when the card is swiped or inserted into the point-of-sale (POS) system. For example, at a gas station, an authorization hold is placed to secure payment before the final amount is known.
The acquirer then forwards the request to what’s called the issuing bank (e.g., the cardholder’s bank). They’re responsible for making sure the request is valid and that the customer actually has available credit to cover the purchase. Placing a hold gives a merchant time to conduct additional security checks before officially capturing the funds.
If everything checks out, the card association approves the transaction and sends an approval code (e.g. merchant category code) back to the acquirer. Card brands set rules for how long authorization holds can last, and these rules vary by transaction type and card network. The acquirer then notifies the merchant that they can go ahead and complete the transaction.
At this point, the funds are not actually transferred from the customer’s account to the merchant’s account. Instead, authorization hold locks are used to temporarily freeze funds in the customer’s account, ensuring the funds are available for the transaction. The card association or the customer’s bank may place this hold, but the money is not yet moved to the merchant’s account. The permitted length of a card authorization hold depends on the nature of the transaction and the merchant category code (MCC). The duration of an authorization hold can also vary based on the MCC, the card network, and the type of payment card used, such as debit cards. If a transaction is not finalized within the allowed time limit, the merchant may be required to start the transaction over and may incur a misuse fee. Holds help prevent administrative chargebacks by ensuring transactions are settled within card network timeframes.
Once the merchant has provided the goods or services, they request that the transaction be settled, which means that the funds are transferred from the customer’s account to the merchant’s account—the final transaction. The acquirer sends a batch of these transactions to the issuer at the end of each day, and the issuer transfers the funds to the acquirer. The acquirer then deposits them into the merchant’s account. This process is known as settling transactions, and the transaction is settled when the final transfer of funds occurs.
Who Should Use Authorization Holds?
Hotels, car rental companies, and other rental services are the industries using the authorization hold mechanism the most. They are standard in these sectors, as the moment of booking and the moment of processing the payment are usually quite far apart. These are also industries where customers may want extra services or the business needs a deposit.
For example, at a hotel, the customer may order room service or other hotel services. There would be a hold on their account to cover these costs, which would be released when they check out, less the total amount of their tab. Restaurants may place a hold that exceeds the initial bill amount by around 20% to ensure adequate credit for tips.
Car rental companies, similarly, will often hold a deposit amount to cover insurance costs in case there is damage to the vehicle.
Many other MCCs outside of hotels and rentals can use auth holds. Merchants also use small temporary holds as a pre-authorization to confirm that a payment card is active and valid.
Online service providers with monthly membership fees, like cloud storage companies or gyms, commonly use authorization holds. In this case, the hold is placed at the beginning of each month and released after the service has been provided. Companies often place a $0 or $1 pre-authorization hold during sign-up for free trials and subscriptions to verify the card.
Some utility companies also use it to make sure that customers have the funds available to pay their bills. They place a hold for the estimated amount of the bill a few days before it’s due and release it once it has been paid.
Recurring payments provide another example. Say a customer signs up for a subscription service that ships a new box of goods to them each month. In this scenario, the merchant would place an authorization hold for the estimated amount of each shipment a few days before it ships and release the hold after the customer has received their goods. Payment card transactions and bank transfers may involve authorization holds as a pre-authorization step to ensure funds are available before the transaction is finalized and transferred to the merchant’s account.
Even gas stations use card authorization holds. Many have policies to put a pre-authorization hold on a certain amount before the customer first pumps gas. This is then released, less the actual charges for the transaction, once the customer has paid and the transaction is finalized.
Authorization holds are typically released on the same day the transaction is finalized, but this can vary depending on the merchant’s account and industry.
Benefits of an Authorization Hold
There are several benefits of using authorization holds:
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Authorization holds are a valuable tool for merchants in various industries, including ecommerce, hotels, and car rentals. They ensure that customers have the funds available to pay for a purchase, reducing the risk of declines.
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It gives merchants more flexibility on when they actually process payments. For example, a hotel can place an authorization hold at the time of booking, even if the customer doesn’t check in for several days.
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It allows merchants to batch transactions together and process them all at once, which can save on transaction fees.
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Using authorization holds can make refunds easier for merchants by allowing them to release funds without processing a return.
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Authorization holds can be particularly useful for ecommerce merchants who are targeted by fraudsters.
Cons of an Authorization Hold
There are also some potential downsides to using authorization holds:
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If a customer doesn’t have enough funds available in their account, the transaction will be declined. This could result in a lost sale.
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If a customer has a small account balance, an authorization hold could cause an overdraft on their account and incur fees.
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If a customer cancels their purchase after an authorization hold has been placed, it is important to promptly reverse the hold on canceled transactions to avoid chargebacks and reduce fraud risks. Otherwise, it can take a few days for the hold to be released, and the customer may not have access to those funds.
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Using authorization holds can result in additional fees, fines, and chargebacks if record-keeping is inaccurate.
How to Use Authorization Holds
If you’re a merchant who wants to use authorization holds, there are a few things you need to do.
First, you need to ensure that your POS system can submit an authorization request and store the approval code. You also need to make sure that your POS system is able to send the request for settlement. This can all be managed through your credit card payment processor.
Second, you need to let your customers know that you’ll be placing a hold on their accounts. You should do this at the time of purchase, either in person or on your website.
Third, you need to decide how long you want the hold to last. This will depend on your business and your particular needs.
Finally, you need to make sure that you have the correct authorization amount and the customer’s account information handy when you’re ready to request settlement. This includes the account number, expiration date, and security code. Failing to settle or reverse authorization holds within the required time limit can result in a misuse fee imposed by card networks.
Setting up Your Systems for Authorization Holds
Your payment processing company is the intermediary with the technology to set up and process your auth holds. You simply need to contact them to set it up for your account. If you are signing up with a new payment processing company, you will need to provide them with:
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Your business name, address, and contact information
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Your bank account information
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Your tax ID number.
Once your POS is set up to process authorization holds, you’re good to go.
When exploring payment processing providers, make sure you also look at how they can save you money on your credit card processing fees. At Payment Depot, we do this by offering membership-style payment processing, giving you access to interchange rates with no markup, no hidden costs, and no cancellation costs.
Contact Payment Depot today to access low-fee payment processing with high POS functionalities, such as authorization holds.
Duration of Payment Holds
The length of time that authorization holds remain on a customer’s account can vary widely, depending on several factors, such as the merchant category code, the card network, and whether the transaction was made with a debit card or a credit card. For most debit card transactions, authorization holds typically last anywhere from 1 to 8 business days. In contrast, credit card authorization holds can remain in place for up to 30 days, especially in industries like hotels or vehicle rentals, where the final transaction amount may not be known immediately.
It’s important for merchants to be aware of the specific time limits set by card networks and banks for different transaction types. Exceeding these limits can result in misuse fees or administrative complications. The duration of payment holds is not just a technicality—it plays a crucial role in ensuring that sufficient funds are available in the customer’s account and helps prevent chargebacks by allowing time to verify and validate the transaction before it is finalized. By understanding and managing the duration of authorization holds, merchants can maintain compliance with card network rules and provide a smoother transaction experience for their customers.
Removing a Payment Hold
Releasing an authorization hold, or removing a payment hold, is a straightforward process that can be initiated by the merchant at any time. This typically happens when a transaction is canceled, the final transaction amount is lower than the original hold, or the merchant no longer needs to reserve the funds. In some cases, customers may also contact their bank to request the removal of a payment hold, especially if they need immediate access to the held funds or are disputing the transaction.
It’s essential for merchants to understand the proper procedures for removing payment holds to avoid confusion or disputes. While releasing an authorization hold frees up the funds in the customer’s account, it does not automatically cancel the transaction. Merchants may still need to settle the transaction or process a refund, depending on the situation. Clear communication with customers about the status of their authorization and transaction can help prevent misunderstandings and ensure a positive experience.
Best Practices for Payment Holds
To make the most of payment holds and avoid potential pitfalls, merchants should follow a set of best practices. Start by clearly communicating with customers about the authorization hold at the time of purchase. This way, there are no surprises regarding their available balance. Always obtain initial authorization for the correct amount, taking into account any potential additional charges, such as room service or extra mileage.
Merchants should also familiarize themselves with the merchant category code and card network rules that apply to their business, as these can affect the duration and management of payment holds. To avoid misuse fees and administrative mistakes, it’s important to track all active holds, monitor their duration, and release or settle them promptly—especially when transactions are canceled or completed. Implementing a reliable system for managing authorizations can help reduce the risk of chargebacks, streamline the transaction process, and enhance the overall customer experience.
Common Mistakes to Avoid
When using authorization holds, there are several common mistakes that merchants should be careful to avoid. One frequent error is failing to obtain sufficient authorization for the expected transaction amount, which can lead to declined payments or disputes. Another pitfall is holding funds for longer than necessary, which can frustrate customers and may result in penalties from the card network or bank.
Merchants should also avoid placing multiple authorization holds on a single transaction, as this can create double holds and confusion for both the business and the customer. Not releasing holds promptly when a transaction is canceled or completed is another common issue that can negatively impact the customer’s available balance and lead to unnecessary chargebacks. By understanding the rules set by card networks and banks, and by managing each authorization as a single transaction, merchants can prevent double holds, streamline the transaction process, and maintain positive relationships with their customers.
Quick FAQs about Authorization Hold
Q: What is an authorization hold in credit card processing?
An authorization hold is a temporary hold placed on a portion of the funds or available credit in a cardholder’s account. This ensures that the necessary funds are available when the merchant processes the transaction. It’s not a charge, but it reserves the transaction amount until the final settlement.
Q: Why do merchants use authorization holds?
Merchants use authorization holds to ensure that customers have sufficient funds to cover their purchases. This helps prevent fraud, guarantees payment for goods or services, and allows merchants flexibility in processing payments, especially when the purchase and the payment processing are not simultaneous.
Q: How do authorization holds help prevent fraud?
Authorization holds prevent fraud by reserving funds in the cardholder’s account, making it difficult for fraudsters to use stolen card information for unauthorized purchases. This temporary hold ensures that if the transaction is fraudulent, the merchant can cancel it without losing money.
Q: What industries commonly use authorization holds?
Authorization holds are standard in industries like hotels, car rentals, and event ticketing. They are also used by online service providers, gyms, utility companies, and gas stations to ensure customers have the funds to cover their transactions or recurring payments.
Q: How long does an authorization hold last?
The duration of an authorization hold can vary but typically lasts from a few hours to several days. It depends on the merchant’s policies and the issuing bank. For example, hotels might hold funds until check-out, while gas stations might release the hold once the actual fuel charge is determined.
Q: What are the benefits of using authorization holds for merchants?
Authorization holds help merchants reduce the risk of declined transactions, prevent chargebacks, ensure payment for services, and batch transactions to save on processing fees. They also provide a buffer against cancellations and disputes, ensuring funds are available for reversals if needed.
Q: What are the potential downsides for customers with authorization holds?
Customers might face declined transactions if their accounts lack sufficient funds for the hold. Small account balances could lead to overdrafts and fees. Additionally, if a purchase is canceled, it may take several days for the hold to be released, temporarily limiting access to funds.
Q: How can merchants implement authorization holds in their business?
Merchants need to ensure their point-of-sale (POS) systems can handle authorization requests and store approval codes. They should inform customers about the hold policy at the time of purchase and decide on the hold duration based on their business needs. It’s essential to work with a payment processor that supports these functionalities.
Q: Can authorization holds be used for online transactions?
Yes, authorization holds are commonly used for online transactions, particularly for services with recurring payments or monthly memberships. They ensure funds are available at the beginning of each billing cycle and are released once the service is provided.
Q: What should customers do if they encounter an issue with an authorization hold?
If customers face issues with an authorization hold, they should contact the merchant or their bank for clarification. Most banks can provide details on pending holds and their expected release times. If a hold causes financial inconvenience, addressing it promptly can help resolve the issue.
