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The Complete Card Pre-Authorizations Guide for Merchants

Card pre-authorization is a temporary hold on a customer's card by a merchant. This pre-auth process reserves funds for a future payment transaction.

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Card Payments pre-authorization is a practice for merchants who accept payments in person or online, offering multiple benefits. This article will explore the meaning of card pre-authorization, how it works, and the benefits it offers for various businesses.

What Is Card Pre-Authorization?

Card pre-authorization, also called pre-auth, is a temporary hold on a customer's card by a merchant. This pre-auth process reserves funds for a future payment transaction. This hold lasts for a few days, but the hold duration may vary depending on the merchant's settings or industry.

How Does Pre-Auth Work?

To grasp how pre-authorization functions in payments, it's important to first understand some key aspects of the buying process. Normally, when you buy something, the merchant charges the amount due immediately. However, they can also opt for a process where they extend the time they have to finalize the charge. This approach is useful when they're not sure how much the final amount will be at the start.

This method gives merchants the flexibility to alter the amount they've been authorized to charge. For example, they might need to increase the charge if the cost of the product or service goes up. Or, they could decide to charge less than the initially authorized amount.

Put simply, this allows merchants to split the payment into multiple parts over a period. During this time, the customer's funds are put on hold but not taken from their account.

When it's time to complete the payment, like when you check out of a hotel, the held funds are then converted into an actual charge.

Pre-authorization is key to making sure customers pay for what they use.

What Is Incremental Authorization?

Incremental authorization comes into play when the initially estimated or authorized amount for a transaction turns out to be too low. This method involves adjusting the authorization to reflect a more accurate estimate of the cardholder's expenses.

It's important to note that incremental authorizations are added on top of the original authorization amount, not replacing it. The total authorization for a transaction is the sum of the original amount plus any incremental additions.

When it comes to finalizing the payment, there are two main situations:

  1. Partial Capture: This happens when the amount actually charged is less than what was pre-authorized.

  2. Full Capture with Refund: In this scenario, the merchant charges the total authorized amount and then refunds any excess back to the customer.

Industries Using Pre-Auth Process

Multiple industries use the pre-auth processMultiple industries use the pre-auth processMany industries employ a pre-authorization method for processing payments. Here are examples of how pre-authorization is especially important in certain industries.

Hotels and Accommodations

Hotels and accommodations use card pre-authorization to guarantee payment for extra charges during a guest's stay. This amount includes room service or damages. 

Car Rental Agencies

Car rental agencies use card pre-authorizations to hold funds when the renter returns the car. They ensure the vehicle's return is in good condition.

Thus, the hold covers any damages or fuel charges.

Tour Operators and Activity Providers

Tour operators and activity providers employ pre-authorization holds to protect themselves when lending expensive equipment. In other words, it acts as a security deposit. It's a protection against loss, damage, or theft.

Grocery and Restaurant Merchants


Grocery and restaurant businesses apply a pre-authorization method to determine the total cost of a purchase. This final amount often includes additional charges like taxes and tips, which means it might be more than the initial authorized amounts.

The Pre-Authorization Process


The pre-authorization method works well for merchants who use integrated, ready-to-use payment systems. They set up their websites to accept payments that are initially pre-authorized, rather than fully authorized right away.

These online payment systems usually have a feature for pre-authorizing payments. This means they can temporarily hold a customer's funds, with the option to fully take the money at set times.

To make things smooth, merchants should inform their customers about the pre-authorization charge and how long the funds will be held.

It's important for merchants to complete the full payment authorization before the temporary hold ends, to prevent the funds from being released back to the customer.

What Are the Benefits of the Pre-Authorization?

Both merchants and customers can reap the benefits of pre-authorization. Here are some of the benefits:

  1. Ensures Customers Pay for Their Services 

  2. Avoids Chargebacks

  3. Avoids Refund Fees

  4. Improves Customer Satisfaction

Now, let’s delve into the details of each one.

  1. Ensures Customers Pay for Their Services

    Pre-authorization eliminates the risk of customers leaving without paying for the services they use. By placing a hold on funds, merchants can ensure all additional charges are covered.

  2. Avoids Chargebacks

    Pre-authorized payments prevent chargebacks on the customers. The confirmed charges are open to dispute.

  3. Avoids Refund Fees

    Payment processors usually have transaction fees, and some might charge extra for refunds. By using pre-authorization, businesses can avoid refunds. When they cancel a pre-authorization, there's no need for refunds or additional fees.

  4. Improves Customer Satisfaction

    If customers cancel their bookings after confirming them, pre-authorization removes the need to refund them. This improves customer satisfaction because they don't have to wait to get their money back.

The Bottom Line

Implementing credit card pre-authorization is a simple yet valuable practice for merchants. It ensures customers pay for their services and reduces costs associated with fees and chargebacks.

As a result, it enhances the overall customer experience. Merchants can leverage this payment method when understanding how pre-authorization works and how to apply best practices.

Consider implementing pre-authorization for online and offline payments and monitor your transactions effectively with MoneyHash to enhance your business operations.


FAQ:

What Is Card Pre-Authorization?
Card pre-authorization also called pre-auth is a temporary hold on a customer's card by a merchant. This pre-auth process reserves funds for a future payment transaction. This hold lasts for a few days but the hold duration may vary depending on the merchant's settings or industry.

How Does Pre-Auth Work?

To understand how pre-authorization works, we need to highlight some payment basics in the purchasing process.

Merchants usually capture the due amount in normal purchases. Yet, they can also use the license and collect payment flow to extend the authorization period.
It is beneficial when the final transaction amount is uncertain at the beginning. 

This feature allows merchants to adjust the authorized amount as needed. 

In other words, it allows merchants to collect their payments partially in separate transactions.

What Is Incremental Authorization?

Incremental authorization is effective when the estimate/initial authorization amount is insufficient. The revised estimate of the cardholder's spending specifies the incremental authorization request.Incremental authorizations do not replace the original authorization. They are additional to earlier authorized amounts.

What Are the Benefits of the Pre-Authorization?

  • Ensures Customers Pay for Their Services 

  • Avoids Chargebacks

  • Avoids Refund Fees

  • Improves Customer Satisfaction


Mohga Koshty

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