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What is Authorization ?

Authorization – Process of validating that a consumer’s credit card is valid for the amount of the transaction at the point of purchase. Authorization must be settled to charge the account.

The practice within the banking industry of verifying electronic transactions initiated with a debit card or credit card and rendering this balance as unavailable until either the merchant clears the transaction, also called settlement, or the hold “falls off.”

In the case of debit cards, authorization holds can fall off the account, thus rendering the balance available again, anywhere from one to eight business days after the transaction date, depending on the bank’s policy. In the case of credit cards, holds may last as long as thirty days, depending on the issuing bank.

Reason for Authorizations

The main reason for authorization holds is where there is a two-step process in the payment, consisting of an authorization and a settlement with a time lag in between. These were common with signature-based (non-PIN-based) credit and debit card transactions where a transaction was authorized but not settled until a few days later. It is also common in hotel, rental car services or on pay at the pump at filling stations where the company wants to confirm a valid method of payment has been received prior to providing services or goods and knowing the amount that will be charged.

The major consequence for the user is that they cannot access that part of their account until the authorization hold expires without being finalized or is settled and the banking system transfers the funds. If the account balance is low this could result in an unavailable funds fee. The actual balance will not be reduced until the merchant submits the batch of transactions, and the banking system transfers the funds.

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