Pre-Auth – preauthorization also card authorizations 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.
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.
The Process of Preauthorization
When a merchant swipes a customer’s credit card, the credit card terminal connects to the merchant’s acquirer, or credit card processor, which verifies that the customer’s account is valid and that sufficient funds are available to cover the transaction’s cost. At this step, the funds are “held” and deducted from the customer’s credit limit (or available bank balance, in the case of a debit card), but are not yet transferred to the merchant. At the time of the merchant’s choosing, the merchant instructs the credit card machine to submit the finalized transactions to the acquirer in a “batch transfer,” which begins the settlement process, where the funds are transferred from the customers’ accounts to the merchant’s accounts.
This process is not instantaneous: the transaction may not appear on the customer’s statement or online account activity for one to two days, and it can take up to three days for funds to be deposited in the merchant’s account. The preauthorization will be terminated if it is allowed to expire before the settlement occurs.
For example, if an individual has a credit limit of $100 and uses a credit card to make a purchase at a retail store for $30, then the available credit will immediately decrease to $70, because the merchant has obtained an authorization from the individual’s bank by swiping the card through its credit card terminal.
If the billing statement were then sent out immediately, the actual charges would still be $0, because the merchant has not actually collected the funds in question. The actual charge is not put through until the merchant submits their batch of transactions and the banking system transfers the funds.
A debit card works differently for Pre-Auth
Like in the previous example, if one has a balance of $100 in the bank and used a debit card to make a purchase at a retail store for $30, the available balance will immediately decrease to $70, as a hold on the $30 is enacted because the merchant has obtained an authorization from the bank by swiping the card through the credit card terminal. However, the actual balance with the bank is still $100, because the merchant has not actually collected the funds in question.
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