In the payments industry, an authorization hold, also known as a card authorization or pre-authorization, is a practice used by merchants and card issuers to verify the availability of funds or credit on a payment card before the actual transaction takes place. It is a temporary hold placed on the cardholder’s account for a specific amount, usually the anticipated transaction amount or an estimated total.
Here’s how an authorization hold works in the payments industry:
- Merchant initiates authorization: When a customer makes a purchase or engages in a transaction, the merchant’s payment system sends an authorization request to the card issuer or payment network to verify the availability of funds or credit. The authorization request includes details such as the transaction amount, merchant identification, and cardholder information.
- Card issuer verification: The card issuer or payment network receives the authorization request and performs various checks to determine if the transaction can be approved. This includes checking the available credit or funds in the cardholder’s account and evaluating any risk factors associated with the transaction.
- Authorization hold: If the card issuer approves the authorization request, they place a temporary hold on the cardholder’s account for the authorized amount. This hold reserves the specified funds, reducing the available credit limit or earmarking the funds for the pending transaction. The hold typically lasts for a specific period, usually a few days, but can vary depending on the card issuer’s policies and the nature of the transaction.
- Available credit or funds: During the authorization hold period, the authorized amount is no longer available for the cardholder to use for other transactions. The cardholder’s available credit or funds are reduced by the held amount, ensuring that the reserved funds are available to cover the pending transaction.
- Final transaction and settlement: Once the merchant completes the transaction, the actual transaction amount replaces the authorization hold. The merchant captures the funds by submitting a settlement request, and the authorization hold is converted into a transaction for the captured amount. The settlement process involves transferring the funds from the cardholder’s account to the merchant’s account.
- Release of hold: If the final transaction amount is lower than the authorized amount, the excess hold is typically released, and the cardholder’s available credit or funds are adjusted accordingly. The release of the hold may take a few days to reflect in the cardholder’s account, depending on the card issuer’s processes and policies.
Authorization holds serve several purposes in the payments industry. They help ensure that cardholders have sufficient funds or credit available to cover their purchases, reduce the risk of declined transactions, and protect merchants from potential losses due to insufficient funds or credit. Additionally, authorization holds can also help detect fraudulent activity by identifying inconsistencies between the authorized and captured amounts.
It’s important for cardholders to be aware of authorization holds when using their payment cards, as they can temporarily impact their available credit or funds. It’s advisable to keep track of pending transactions and monitor account statements to ensure accurate accounting of authorization holds and timely release of any excess holds.
