Credit Card Authorization Holds: A Guide to Understanding Their Importance

If your businesses’ chargeback ratio exceeds 1% your business can face $25,000 fines and be banned from the Visa and Mastercard network. Credit card holds can help radically reduce your chargeback rate while also guaranteeing your business payment, improving cash flow and inventory management. In this article we will explore how your business can effectively use credit card authorization holds.

What Are Authorization Holds?

Credit card authorization holds are temporary holds placed on a credit card to verify its validity and ensure the availability of funds for a transaction. During the authorized hold, the card issuer reserves the funds on the cardholder’s account, effectively reducing the available credit or available balance by the authorized amount. This hold ensures that the funds will be available when the transaction is completed.

Authorization holds are not actual charges or payments but temporary deductions from the available credit or balance. The hold typically lasts for a predetermined period, ranging from hours to days, depending on the merchant’s policies and the card issuer. Once the transaction is finalized, the merchant submits the payment request, and the hold is either replaced with the actual charge or released.

Why Merchants Should Use Authorization Holds

Credit card authorizations are a valuable tool that merchants can utilize to enhance their business operations and protect themselves against fraud. By implementing credit card authorizations, merchants can experience improved security, streamlined processes, and better inventory & financial management.

Prevent Fraud

Credit card authorizations play a vital role in preventing fraud by checking if the card is valid and by ensuring the availability of funds before a transaction is completed. Here’s exactly how credit authorizations help in preventing fraud:

• Validating the Card: When a merchant requests a credit card authorization, the card issuer verifies the card’s information, including the card number, expiration date, and security code. This step ensures that the card is legitimate and has not been reported lost or stolen.
• Verifying Sufficient Funds: The authorization process checks whether the cardholder has enough available credit or funds to cover the transaction. If the card has insufficient funds, the authorization will be declined, preventing the transaction from proceeding.
• Reducing Risk of Chargebacks: Merchants can confirm that it is an authorized  transaction and the customer agreed to the purchase. This helps reduce the risk of chargebacks where a customer disputes the transaction.
• Fraud Detection and Prevention: Credit card issuers employ sophisticated fraud detection systems to analyze patterns, monitor spending behavior, and identify potential fraudulent activity. 
• Address Verification and Security Codes: During the authorization process, merchants can perform additional security checks, such as address verification and validation of the card’s security code (CVV/CVC). These measures add an extra layer of protection by confirming that the cardholder has physical possession of the card.
• Real-Time Monitoring: Authorization systems allow for real-time monitoring, enabling immediate responses to potential fraud indicators. If an authorization triggers a red flag, the card issuer or merchant can investigate further, contact the cardholder for verification, or decline the transaction.

A temporary authorization acts as a crucial safeguard against fraudulent transactions. By verifying card validity, ensuring sufficient funds, and employing fraud detection measures, they help protect both merchants and cardholders from unauthorized charges and fraudulent activities.

Guaranteeing Payment and Managing Inventory

Credit card authorizations provide merchants with a level of certainty regarding payment and assist in managing inventory. By reserving funds, minimizing fraud risk, and ensuring a smoother payment process, authorizations contribute to a more efficient and secure transaction experience for both merchants and customers.

• Reserved Funds: During the authorization process, the card issuer places a temporary hold on the customer’s available credit or balance for the authorized amount. This reservation ensures that the funds are reserved specifically for the transaction.
• Better Inventory Management: By authorizing the payment before completing the transaction, merchants can ensure that the items or services requested by the customer are reserved, preventing overselling or running out of stock. This helps maintain accurate inventory levels and reduces the risk of disappointing customers with unavailable products.
• Order Confirmation: The authorization serves as a confirmation that the customer is committed to the purchase. It provides a level of assurance to the merchant that the customer intends to proceed with the transaction, allowing them to proceed with order fulfillment, packaging, and preparation.
• Reduce Fraudulent Orders: Credit card authorizations act as a deterrent against fraudulent orders. By validating the card details, checking for sufficient funds, and employing fraud detection measures, merchants can identify potential red flags and decline suspicious transactions. 
• Streamlined Payment Process: With credit card authorizations, the payment process can be expedited. Merchants can capture the authorized funds once the order is ready for shipping or fulfillment, reducing the time and effort spent on manual payment collection.

Navigating the Process of Credit Card Authorization Holds and Releases

The credit card hold process involves several steps that sellers follow to authorize and reserve funds on a customer’s credit card. Here is a detailed explanation of the credit card hold process works:

• Customer Initiates Purchase: The customer selects items or services for purchase and proceeds to the checkout process on the merchant’s website or at a physical store.
• Payment Method Selection: The customer chooses to pay with a credit card and provides the necessary card details, including the card number, expiration date, and CVV code.
• Authorization Request: The seller makes an authorization request to the payment processor or acquiring bank to verify the customer’s credit card details and request authorization for the transaction amount.
• Authorization Verification: The payment processor or acquiring bank receives the authorization request and verifies the validity of the credit card details. They perform checks to ensure the card is not reported stolen, the account is not over the credit limit, and the customer has sufficient funds available.
• Authorization Approval: If the credit card details and funds availability are confirmed, the payment processor or acquiring bank approves the authorization request. They send an authorization code to the merchant indicating that the funds are reserved for the transaction.
• Temporary Hold on Funds: Upon receiving the authorization approval, the merchant places a temporary hold on the customer’s credit card for the authorized amount. This hold ensures that the funds are reserved for the merchant and cannot be used for alternate transactions.
• Transaction Processed: With the authorization hold in place, the seller completes the transaction and sends the goods.
• Settlement and Charge: Once the transaction is completed, the seller initiates the settlement process. The authorized amount is captured, and the funds are sent to the merchant’s account.
• Release of Authorization Hold: After the settlement is successful, the merchant releases the authorization hold on the customer’s credit card and becomes available usually within a few business days, depending on the issuing bank’s policies.

The specific steps and timeline involved in the credit card hold process may vary depending on the payment processor, acquiring bank, and the merchant’s policies.

Understanding the Effects of Authorization Holds on Credit Card Balances

Credit card authorizations lead to a temporary reduction in available credit. When a credit card authorization occurs, the authorized amount is temporarily held or reserved on the buyer’s credit card. This reduces the available credit limit by the authorized amount.

When the authorized amount is deducted it restricts the buyer’s spending power. They cannot utilize the portion of their credit limit that is being held for authorization until the hold is released.

If a buyer has multiple authorizations pending on their credit card, the cumulative effect of these holds can significantly impact their available credit limit. This can limit their ability to make additional purchases until the holds are released and the funds are made available again.

The duration of an authorization hold varies depending on the merchant and the card issuer’s policies. The release of the held funds may not be immediate, and it can take several days or longer for the hold to be lifted and the credit limit to be restored.

Buyers need to under that authorization holds increase their credit utilization ratio, which is the percentage of available credit they are using. The higher the utilization ratio, the more it can impact their credit score. Authorization holds may temporarily inflate the credit utilization ratio until the holds are released.

Preventing Chargebacks with the Help of Credit Card Authorization Holds

Credit card authorizations are important in stopping chargebacks, which occur when a customer disputes a transaction and seeks a refund from the credit card issuer by:

• Customer Confirmation: Credit card authorizations require the customer to actively participate in the transaction by providing their card details and authorizing the payment. This confirmation helps establish that the customer willingly initiated and approved the transaction.
• Validating Card Details: During the authorization process, the merchant verifies the card details, such as the card number, expiration date, and security code. This step ensures that the customer possesses a legitimate credit card.
• Sufficient Funds Verification: The authorization process verifies whether the customer has sufficient funds or available credit to cover the transaction.
• Real-Time Fraud Detection: Credit card issuers and payment processors employ sophisticated fraud detection systems that analyze transaction patterns and monitor for potential fraudulent activity. During the authorization process, these systems assess various risk factors and flag suspicious transactions, helping merchants identify and prevent fraudulent transactions that may later lead to chargebacks.
• Address Verification and Security Codes: Merchants can perform additional security checks during the authorization process, such as address verification and validation of the card’s security code (CVV/CVC). 

Examining the Pros and Cons of Credit Card Authorization Holds

Credit card authorizations offer significant advantages such as payment guarantee, reserved funds, and fraud prevention. However, they may introduce temporary inconveniences and limitations for customers, requiring merchants to strike a balance between security and customer experience.

Pros of Credit Card Authorizations:

• Payment Guarantee: Credit card authorizations provide assurance to merchants that the customer’s funds are available and reserved for the transaction, reducing the risk of non-payment.
• Reserved Funds: The temporary hold on the customer’s available credit or balance ensures that the funds are set aside specifically for the transaction, reducing the likelihood of the customer using those funds for other purposes.
• Better Inventory Management: By authorizing the payment before completing the transaction, merchants can prevent overselling or running out of stock. 
• Order Confirmation: Credit card authorizations serve as confirmation that the customer intends to proceed with the purchase.

Cons of Credit Card Authorizations:

• Temporary Reduction in Available Funds: The authorized amount is temporarily held, reducing the customer’s available credit or balance until the transaction is completed. This can limit their spending power until the hold is released.
• Inconvenience for Customers: Some customers may find the authorization process time-consuming or cumbersome, especially if multiple authorizations are required for different transactions.
• Authorization Holds and Release Timing: The duration of the authorization hold can vary, and the release of funds may not be immediate, potentially causing delays in accessing the reserved funds.
• Potential for Errors: In some cases, authorization holds may not be released promptly or may be released incorrectly, leading to confusion and potential financial inconvenience for customers.

Expert Tips for Merchants to Effectively Use and Manage Authorization Holds

Merchants using credit card holds can follow these best practices to ensure smooth transactions and customer satisfaction:

• Clear Communication: Clearly communicate to customers about the possibility of a credit card hold during the purchase process. Provide information on the purpose, duration, and any specific conditions associated with the hold.
• Accurate Amount Calculation: Ensure that the authorized amount accurately reflects the total purchase cost, including taxes, fees, and any potential additional charges. Over- or under-authorization can lead to customer dissatisfaction or inconvenience.
• Prompt Release of Holds: Release the credit card hold as soon as the transaction is finalized or any necessary follow-up actions, such as shipment or completion of services, are completed. Avoid unnecessary delays in releasing holds to minimize customer frustrations.
• Clear Refund Policies: Establish and communicate clear refund policies to customers in case of cancellations, returns, or adjustments to the authorized amount. Timely and accurate refunds can help maintain customer trust and satisfaction.
• Customer Support: Provide accessible customer support channels to address any concerns or inquiries related to credit card holds. Promptly respond to customer queries and provide assistance in understanding the hold process.
• Compliance with Regulations: Ensure compliance with relevant payment industry regulations, such as the Payment Card Industry Data Security Standard (PCI DSS), to protect customer data and maintain a secure transaction environment.

By following these best practices, merchants can effectively use credit card holds while minimizing customer inconveniences and maintaining positive relationships with their customers.

Authorization Holds: FAQ