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Understanding Credit Card Pre-Authorizations

Using credit card pre-authorization is an important procedure that merchants can use if they accept payments both online and in-store. It serves as a guarantee that the customers will pay for the products and services they use. It is also a time and a money saver as they don’t have to worry about paying fees for refunds, processing any chargebacks, and MDRs. 

Many merchants are unfamiliar as to how credit card pre authorizations work. As a result, merchants are reluctant to use them. However, they are not as complicated as they sound. Continue reading below to gain a better understanding as to what credit card pre authorizations are and how they work. 

What Is Credit Card Pre-Authorization? 

A basic definition of credit card pre-authorization is that it is a momentary hold that is placed by a merchant on a customer’s credit card. It essentially “reserves” the amount of money necessary for a payment transaction in the future. The hold normally lasts for about five days, however, this greatly depends on the MCC (merchant classification code)

Within this time frame, this amount of money is not available to the customer. Therefore, they will not be able to remove these funds from an ATM or use it to spend anywhere else. Even though the money cannot be accessed within their bank account, (no funds have been debited during the pre-authorization), it is only reserved. When the time to finalize the payment arrives, the money that was on reserve will be “captured” or released as a charge. 

How Does The Credit Card Pre-Authorization Work?

Merchants must have a “turnkey payment solution” in order to facilitate pre-authorizations. If you are taking online payments, the process can be divided into two steps:

  • Configure your website to accept pre-authorizations not full authorizations.

The shopping cart software that you currently use should have the option to process credit card pre-authorizations. When a customer makes a purchase online, the transaction will be processed as a pre-authorization, which means the customer’s funds will be placed on hold. If merchants are accepting payments via their website, it is critical to set up the shopping cart option to allow for pre-authorizations. 

  • Obtain the funds.

Your credit card processing platform will be responsible for obtaining the funds. 

At this stage, the funds will be turned into a charge. 

If merchants accept payments by phone through a virtual terminal, the same 

terminal should give you the option to choose authorization or pre-authorization. 

When the “pre-authorization” is selected, simply enter the customer’s credit card 

information and receive confirmation from the customer. When the time arrives, 

keep in mind that you will need to go back and capture the money via an 

authorized payment.

To ensure that credit card pre-authorizations run smoothly, inform your customer that you are taking a pre-authorization charge. Explain that you are holding the money on their card as reserved funds. Ensure that they know how long this hold will last. 

As the merchant, make sure you obtain the payments before the fifth day. This is to ensure that the funds will still be in the customer’s account. If you wait till after the expiration date, those funds will be released back into the customer’s account. This will mean having to contact the customer in order to put the funds on hold again. 

Credit Card Pre-Authorization Provide Great Benefits For Merchants

Allowing your business to have pre-authorization benefits both you and your customers. As a merchant, it offers peace of mind, knowing that your customer will never leave without paying you for your goods and services. The great convenience for the customer is that if the customer must cancel a reservation, they can simply cancel and their hold will be cancelled as well. They will not need to wait for their funds to return to their account.