Transaction authorization holds are commonplace in the field of banking finance. It’s also a valuable tool for merchants who accept debit and credit cards as payments. Suppose a customer buys a good or service using their debit or credit card. You can place an authorization hold on their account for the transaction amount.
Such holds are standard processes in businesses like hotels, car rental agencies, and petrol stations. Generally, placing an authorization hold on a debit or credit card transaction helps lower costs and minimize unnecessary hassles. It can serve as an insurance policy for the merchant.
How does that benefit your business? This article walks you through the different types of authorization holds, how they work, and ways you can use them for maximum efficiency.
Types of Authorization Holds and How They Work
Authorization holds enable merchants to confirm that funds are available in a bank account or credit card. Subsequently, the funds are put on hold, making them inaccessible for future transactions. For instance, your credit card has a $20,000 limit, and a $3,000 hold is placed on it. The remaining amount, which is $17,000, is the amount that can only be used.
That’s also how it works when placing a debit card transaction on hold. But depending on the particular transaction and the merchant’s policies, businesses can employ the following types of authorization holds:
- Pre-Authorization Holds: These are temporary holds for certain transactions on a customer’s payment card. The hospitality industry usually uses these holds to ensure the card has enough funds to cover the charges.
- Card Verification Holds: These holds are usually utilized for online transactions or when conducting transactions over the phone. They’re employed to verify that the payment card is valid and has adequate funds.
- Delayed Delivery Holds: Merchants use these holds to validate that the customer will obtain the product or service before charging the entire amount. These are also common for online purchases where the shipment isn’t immediate.
- Merchant-Specific Holds: Merchants place these holds on transactions to protect themselves from chargebacks or other issues. These holds can differ based on the specific policies of the merchant.
The duration of these types of authorizations varies depending on several factors. Typically, holds on debit card transactions last for one to eight business days. Meanwhile, the period for authorization holds can extend up to a month for credit card transactions.
Suppose the account holder wants to access the frozen funds. They may have to contact the bank or merchant and request to remove hold on debit card.
Benefits of Using Authorization Holds in Your Business
Authorization holds are advantageous for hotels, gas stations, and rental car companies. Likewise, other merchants may consider implementing authorization holds and benefit from the following:
Minimize the Risk of a Chargeback
Using an authorization hold enables you to delay the completion of a transaction. This way, you can minimize the risk of chargebacks when a cardholder requests a return of their funds. Too many chargebacks can result in a loss of revenue. However, without finalizing transactions, customers cannot file a chargeback against your merchant account.
Prevents Fraudulent Transactions
You can verify whether the credit or debit cards are legitimate with an authorization hold. Specifically, the authorization process allows you to confirm the card number, expiration date, and security code of the card. It can help prevent fraudulent transactions as the hold checks the card’s authenticity, ensuring the customer has a legitimate credit card.
Makes the Refund Process Easier
There might be instances where the customers return a product and request a refund. Besides avoiding chargebacks, using an authorization hold makes the refund process easier. You simply release the funds from the hold if the customer cancels the order or requests a refund before settlement. Doing so helps you save time, hassle, and processing fees.
Guarantees You Get the Payment
Authorization holds on credit cards provides a payment guarantee. Placing a hold on the customer’s card prevents them from spending the money before settling the transaction. Since it ensures the funds are available and reserved for the transaction, it mitigates non-payment risk.
How To Use and Manage Authorization Holds In Your Business
Authorization holds may also come with some drawbacks. For instance, the amount put on hold may exceed the final sale amount, restricting the cardholder’s available funds or credit limit. Businesses can adhere to the following best practices to ensure seamless transactions and customer satisfaction:
- Inform the customers about potential holds.
- Ensure accurate calculation of the authorized amount on hold.
- Release the holds as promptly as possible.
- Set clear policies on refunds.
- Offers accessible customer support.
- Adhere to payment industry regulations.
Conclusion
Understanding the different aspects of authorization holds can help you decide whether this tool will be helpful in your business. If your company encounters chargebacks, fraud, or other payment-related problems, they may be worth considering. If so, don’t hesitate to contact your card processors for further advice and details.