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Everything you need to know about pre-authorization transactions

August 23 2017 | By Helen Baginska

Many businesses use pre-authorization as a way to ensure that funds are available, especially if they are not charging for the product or service on the same day. There are many industries that use pre-authorization transactions, including the most commonly known, hotel and car rental companies.

Imagine owning a bridal boutique, where you sell custom made wedding gowns. Each dress is unique and requires a lot of work. You need to buy specific fabrics and accessories and invest a lot of time into creating each piece. If you don’t take a deposit, you are taking a lot of risk. In this example, getting a deposit pre-authorized is a smart move. First and foremost, it gives you a level of assurance regarding your customer’s ability to pay, and secondly, it ensures commitment from both parties.

Let’s see how pre-authorization transactions work:

  • A pre-authorization, commonly referred to as a “pre-auth”, involves verification of a cardholder’s account, to determine if funds are available for the intended purchase.
  • A pre-auth places a hold on a specified amount, until the transaction is completed or the hold time expires.
  • A pre-authorization can be left open when a batch is closed and be completed in another batch or on another day.
  • A pre-authorization can’t be completed for more than the original pre-authorized amount. It can be completed for a lesser amount though.
  • A pre-authorization temporarily decreases the customer’s available credit limit, as some of the funds are held until the transaction is completed or the hold expires.
  • A pre-authorization expires within 7 to 30 days after being processed, if it’s not completed. This depends on the card brand type. Visa usually gives 30 days for an authorization to expire and MasterCard typically gives 7.
  • You can void a pre-auth by completing it for $0.00.

Let’s say you pre-authorize $100 on a card with a total credit limit of $500, and your terminal saves an open pre-auth transaction for the next 7-30 days, depending on the card brand. The cardholder’s account reflects this hold too, and they have $100 less in their account. This means that even though the purchase is not yet complete, only $400 of credit is available on the card. This ensures when the time comes to pay for the purchase, you’re able to complete the transaction because the funds are set aside for you.

Now let’s say a few days later, the order, which is a total of $200, is ready to be picked up and the customer shows up to pay the balance. Be very careful not to process the entire amount of $200 as a sale, because then the customer would end up with $200 charged to their credit card while another $100 remains on hold (until the pre-auth expires). The additional hold of $100 can make a customer very unhappy.

The proper way to do it would be to complete an original pre-auth for $100 and process a sale for another $100. This way there will be no additional hold on the customer’s account.

If the customer changed their mind and you need to cancel a pre-auth, simply complete it for $0.00 on your POS terminal. 

 

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