When you place authorization holds for debit and credit card transactions, it becomes a safe, smart, and easy way for merchants to protect themselves from chargebacks, fraud, and refunds which are unnecessary. While it is common to find them used in certain industries, most of the merchants who accept credit cards should ensure that they utilize the Credit Card Authorization Form Template at their disposal.
What does an authorization hold mean?
Just as it sounds, it is a hold which is placed on funds before an authorization is made. It is at times referred to as pre-authorization or card authorization, where merchants can utilize the authorization hold temporarily, locking the funds for a certain transaction, to ensure that the funds are locked for a certain transaction so that payments for certain purchases are made through debit or credit card. It is a process which is easy to understand but you will need to understand it first before utilizing it.
To complete a transaction payment via a card, it will involve two steps: the purchase being authorized, and the transaction being settled. During the authorization process, funds are not transferred from the cardholder to the merchant. That is only the bank’s way of telling the merchants that, there are funds for purchase which exist.
When payment is made by a customer using a debit or credit card, the cardholder’s issuing bank is contacted by the merchant and an authorization code is requested. The bank then responds to the authorization request by telling the merchants on the way to proceed. Some of the responses could include:
- Approved: Meaning that after the Credit Card Authorization Form Template has been filled, the account seems to be in good standing and that the card has not been reported stolen or lost. The account has enough funds to be able to cover the entire transaction.
- Partial approval: The account seems to be in good standing and the card hasn’t been reported stolen or lost but there might be insufficient funds to be able to cover the whole transaction.
- Declined: The account seems not to be in good standing, or the card might have been reported stolen or lost or there are not enough funds to cover the transaction.
- Referral: The bank could be indicating that there is a problem with the card number and thus, the customer has to contact their bank.
- Incorrect PIN: The transaction has been declined due to the fact that the client entered an incorrect pin. The customer has an option of re-entering their pin.
- Expired card: The credit card being used has expired and the customer has the option of re-entering the expiration date.
- Pick-Up card: The bank which issued the card has declined the transaction and instead, requested that the physical credit card be retained due to the fact that, it might have been reported stolen or lost.
In case the authorization request ends up being approved, then the merchant will have to wait for the account to be settled. But there is also an option for merchants where they can place an authorization hold on the account of the cardholder. With the hold, the customer’s available credit limit is decreased or the funds which are available, as there is an anticipation of a transaction being completed.
How does the authorization hold work?
There are several industries which make consistent, effective use of pre-authorizations such as gas stations and hotels. The step by step process involves:
- There is a payment card which is swiped at a gas station
- The bank which issued the card automatically places a hold on a certain amount of available credit or funds
- Immediately the sale is completed, the transaction is forwarded for settling
- The hold which was temporal is released
- The final transaction cost is transferred from the account of the customer to that of the merchant.
In case the process was immediate, then there will be no need for authorization holds. The truth is that the actual payment is normally released to the merchant fills Credit Card Authorization Form Template and submits it to the acquiring bank which takes several days.
When there is no authorization hold, a customer who is not honest might make a theoretical purchase, after which, they drive to an ATM and withdraws all the money from their account. If that happens, the merchant would then get stuffed. But with a pre-authorization in place, the money which is on hold cannot be touched until either the time limit expires or the account has been settled.
Authorization hold misuse fees and time limits
The limit in terms of time for an authorization hold depends on the classification code of the business merchants (MCC). Most of the debit card holds are normally between 1 to 8 business days while for a credit card, it can take as long as a month.
If you are a merchant, it is important to know about the time limits because: in case the transaction is not settled within the specified time, there will be a need to rescan the card which might be impossible. There is also the misuse fee, which is a fee imposed for authorizations which are not reversed or settled within the specified time.
A scenario that might cause the above includes a transaction which is processed and placed on holds until the goods are shipped. This is good news to the customer since the card will not be charged until their purchase has arrived. But in case the pre-authorization is not settled for a long time, then chances of the merchant being slapped with a misuse fee are high.
Why use authorization holds?
There are several reasons for you as a merchant to use authorization holds and in most cases, it is just to ensure that, better business is built. Other reasons include:
- Lowering costs and saving money
- Keeping customers happy always
- Being able to curtail chargebacks
- Ensuring that both parties feel secure to transact the business without causing any inconveniences.