In the world of digital payments, businesses often use pre-authorization charges (also called holds) to secure funds before a final transaction is completed. This ensures that customers have enough funds to cover a purchase while allowing businesses to mitigate risks such as chargebacks and fraud.
In this blog, we break down how pre-authorizations work, when funds are released, and what happens if a hold is not settled.
What is a Pre-Authorization Charge?
A pre-authorization (pre-auth) charge is a temporary hold placed on a customer’s credit or debit card by a business. Instead of immediately debiting the amount, the bank reserves the funds, reducing the available balance until the transaction is finalized or cancelled. Pre-auths are widely used in industries such as hospitality, car rentals, and e-commerce.
Why Businesses Use Pre-Authorizations
Businesses rely on pre-auth charges for several reasons:
Fraud Prevention: Ensures the card is valid and has sufficient funds before services are provided.
Managing Additional Charges: Hotels and car rentals use holds to cover potential extra costs (e.g., damages, late fees).
Reducing Chargebacks: Helps businesses verify legitimate transactions before charging the customer.
Smoother Refund Process: If an order is cancelled, the pre-auth simply expires instead of requiring a refund.
How Long Does a Pre-Authorization Last?
The funds can be held for about 7 days, If the merchant does not finalize the transaction within the hold period, the funds are automatically released back to the customer’s account.
Releasing or Settling the Funds
There are two possible outcomes for a pre-auth transaction:
Captured (Settled) Transaction: The merchant processes the final charge, converting the hold into a completed payment.
Released (Voided) Hold: If the business does not finalize the transaction, the bank automatically releases the hold, returning the funds to the customer.
What Happens If a Hold is Not Released?
In rare cases, a pre-authorization hold may not be removed automatically due to system errors or delayed processing. In such instances, customers can:
Reach out to their bank for assistance in lifting the hold.
Wait for the pre-auth period to expire, at which point the funds should be released automatically.
Conclusion
Pre-authorization charges are a vital tool for businesses to manage payments efficiently while ensuring customer funds are available for a transaction. Whether you’re a merchant looking to implement pre-auths or a customer navigating a temporary hold, understanding the process can help you handle transactions more smoothly.
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