Authorization holds, also known as card authorization or pre-authorization, are common practices in the banking and payment industries. They are temporary holds placed on a customer’s funds by a merchant or financial institution to ensure that the customer has sufficient funds to cover a transaction. In this article, we will explain what an authorization hold is, how it works, and why it is important.
What is an Authorization Hold?
An authorization hold is a temporary hold placed on a customer’s funds by a merchant or financial institution. This hold is placed to ensure that the customer has sufficient funds to cover a transaction. For example, if you check into a hotel, the hotel may place a hold on your credit card for the amount of the room charge, plus any incidentals such as room service or minibar charges. The hold ensures that the hotel will be paid for these charges even if you leave without paying.
How does an Authorization Hold work?
When a customer makes a purchase or engages in a transaction that requires payment authorization, the merchant or financial institution sends a request to the customer’s bank or credit card issuer to verify that the customer has sufficient funds to cover the transaction. If the bank or issuer approves the request, they place a temporary hold on the customer’s funds for the authorized amount. This hold typically lasts for a few days, but it can last longer depending on the merchant’s policies.
During the hold period, the authorized funds are not available to the customer. For example, if you have a $1,000 credit limit and a $500 authorization hold is placed on your card, you will only have $500 available credit until the hold is released. If you try to make a purchase that exceeds your available credit, the transaction will be declined.
Why is an Authorization Hold important?
Authorization holds are important for both merchants and customers. For merchants, authorization holds help to minimize the risk of fraudulent transactions and chargebacks. If a merchant did not place an authorization hold on a customer’s funds, the customer could potentially make a large purchase and then dispute the charge, leaving the merchant with a loss. Authorization holds also ensure that merchants are paid for any additional charges that may be incurred after the initial transaction, such as room service charges at a hotel.
For customers, authorization holds help to prevent overspending and overdraft fees. If a customer tries to make a purchase that exceeds their available funds, the transaction will be declined, preventing the customer from incurring fees or charges. Authorization holds also provide a level of protection against fraud, as they can alert customers to unauthorized transactions or unusual activity on their accounts.
Authorization holds are an important part of the payment and banking industries. They help to ensure that both merchants and customers are protected against fraud and overspending. If you have questions about authorization holds or how they work, be sure to contact your bank or credit card issuer for more information.