Understanding Credit Card Authorization Hold and How to Apply It

As the rate of transaction disputes continues to skyrocket, applying an credit card authorization hold can save you so much trouble. Authorization holds are a skillful way of limiting your exposure to digital fraud, MDRs, and chargebacks. 

And by the way, many industries have been using that mechanism to limit digital fraud.

If you’re not yet applying credit card authorization hold to your transactions, this article is for you. You will get vital information on the instrument and take advantage of it to boost seamless digital transactions.

Understanding Credit Card Authorization Hold

In simple terms, authorization hold, also known as card authorizations or pre-authorizations (pre-auths), puts a limit on a specific amount of money, reducing the balance of available funds until the merchant clears the transaction after the transaction is completed or aborted. The authorization mechanism allows vendors to restrict funds for a specific transaction easily and ensure that revenue from credit or debit card transactions is secured.

Traditionally, CNP transactions involve the cardholder authorizing the purchase and acquirer settling the transaction. But with the authorization mechanism, funds aren’t transferred from the cardholder to the merchant. For every card transaction, the vendor will contact the cardholder’s issuing bank and request an authorization code. 

If the bank approves the authorization, the merchant will then wait for account settlement. The merchant can also choose to lock some of the customer’s available funds with an authorization hold until the transaction is completed.

Below are some ideal outcomes for an authorization request, which will determine whether or not the merchant proceeds with the transaction:

Approved: The account is in good standing; no one has reported the card lost or stolen and it has enough funds to cover the transaction.

Approved Partial: The account is in good standing, no one has reported the card lost or stolen, however, there may not be sufficient funds to cover the entire transaction.

Declined: The account is not in good standing, someone has reported the card lost or stolen, or the account doesn't have sufficient funds to cover the transaction.

Referral: The bank is indicating there is an unspecified problem with the credit card number. The customer should contact the issuing bank.

Incorrect PIN: They declined the transaction as the customer entered an incorrect PIN. The customer may attempt to re-enter their PIN.

Expired Card: The credit card has expired. The customer may attempt to re-enter the expiration date.

Pick Up Card: The issuing bank has declined the transaction and requested that the physical credit card be retained (generally because the card was reported lost or stolen).

How to Apply Credit Card Authorization Hold

Pre-authorization is a form of insurance for services delivered. It helps mitigate fraud and ensure that customers pay for their purchases. For example, a customer makes a purchase and then drives to a nearby ATM to empty his account. That means the merchant is screwed. Having pre-auths will save you such a headache. You can construct the process to ensure the transaction funds can’t be touched until either the account is settled or the time limit runs out.

Here is how the process works:

1. ‍Design your e-commerce store to accept pre-authorizations.

The first step is to program your shopping cart software to include an option for processing pre-authorization. That way, when a customer places an order on your e-commerce store, the order will not be processed as a full authorization but a pre-authorization. And a hold will be put on the customer’s funds. 

If you are using a third-party storefront or platform, ensure the shopping cart you are using has the "credit card authorization hold" option available. When activated, transactions funds will be on hold until the payment is satisfied or otherwise, as stated above.

2. Begin capturing transaction funds.

Your credit card processing platform has the duty of ensuring funds are adequately captured. At this stage, they will convert the temporary hold into a charge. Depending on how you designed your store, you might deduct these payments from within the shopping cart software interface. 

Suppose you have the option of receiving transaction payments over the phone through an online portal. In that case, you should design the platform to display an option for either authorization or pre-authorization. In this case, the pre-authorization process remains the same. Capture the customer’s card data as in any standard payment, and confirm it with the customer. Also, don’t forget to record the money via an authorized amount later, when the time comes. 

Overall, below are crucial considerations to ensure the card authorization process isn’t defeating its purpose.

• Always explain the pre-authorization charge to your customer. Give them ample information on the process and make sure they are clear about the "pre-authorization hold" time limit. 
• Remember to capture the fully authorized payments before the time limit (five days for some card networks) while the funds are still being held in the customer’s account. If you miss the time limit and the pre-auth expires, the funds will be released back to the cardholder and you will need to start the process again. Do your best to avoid such inconvenience. Be aware, if the pre-auth remains unsettled for far too long, you could incur a misuse fee.  

Benefits of Credit Card Authorization Hold

Without controversy, credit card authorization provides many essential benefits to your business. Here are some:

Reducing Chargeback Incidents: The fundamental reason many merchants construct the pre-authorization process is to create a seamless defense against chargebacks. As much as speedy transaction settlement is crucial for maintaining category leadership, a credit card authorization hold gives you a needed time delay to validate charges and excavate potential fraud before they cost you a lot more money.

With that mechanism, fraudulent customers can’t dispute the transaction or issue a credit or debit card chargeback. That also cancels out any shoplifting attempts, such as unauthorized transactions.

Credit Card Authorization Hold Leads to Good Business: Every e-commerce vendor knows there are times when orders can be delayed due to stock shortages, logistics challenges, and so on. With pre-auths, you can pre-empt the consequences of such breakage on your business. Being upfront and informing your customers that there won’t be any charges on their cards until their order is shipped leads to increased buyer trust. And it could equally limit incidents of cart abandonment. In essence, a credit card authorization hold helps you to reduce digital commerce risks while providing delayed transaction billing. 

Credit Card Authorization Hold Helps You Lower Operational Cost: With authorization holds, you can quickly stop the need to issue payment refunds. In the case that a customer cancels a transaction before settlement, you don’t have to deal with any pressure; the funds are released from hold. Hence, you can conveniently avoid the labor of refunds and escape any ancillary fee the bank or processor might slap on you for such a refund.

More so, card networks such as Mastercard, Amex do not charge interchange fees unless the order in question is authorized and funds are successfully transferred from the customer’s account to the merchant. 

Chargeback Automation Starts Where Authorization Hold Ends

A question is asked whether credit card authorization can go wrong. And the answer is straightforward: The non-uniformity in the application of pre-auths creates a significant challenge for merchants.

Because hold time limits vary across industries, type of card (that is, credit vs. debit card), types of sales, and the mechanism can be confusing. 

And when things go wrong, for instance, if funds stay on hold longer than expected, banks automatically punish merchants when cardholders complain.

In essence, while credit card authorization hold is an effective way to shield your e-commerce store from the devastating impacts of chargebacks, they are by no means a silver bullet.

As an intelligent entrepreneur, you need a comprehensive digital risk mitigation tool that meets today's and tomorrow’s challenges. What you need is an entirely done-for-you framework that helps you win representment and prevents chargebacks efficiently. And Chargeflow has crafted a reliable digital infrastructure to give merchants various business stages the needed upper hand in chargeback mitigation.

Sign up here and see how our platform can quickly help you put the headache of chargebacks and disputes behind you.