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Credit card payments are a common form of payment for online marketplaces, hospitality bookings, and more. It’s standard for many businesses to pre-authorise credit card transactions, but what is credit card pre-authorisation and how does it work? We’ll cover the basics in this guide.
What is a credit card pre-authorisation?
A credit card preauthorisation is sometimes referred to as a reserve, pre-auth, or authorisation hold. No matter the terminology, it refers to a temporary hold placed on a customer’s card until the transaction is settled. This typically lasts for five days until post-authorisation, but this duration can vary according to merchant terms and conditions.
The purpose of a pre-authorisation is to ensure that adequate funds remain in the customer’s account until they are authorised and settled. It’s similar to the waiting period when you’ve cashed a check, when you can see the new balance in your account despite the check still being processed. At the end of the holding period, the merchant follows through with post-authorisation. This serves as confirmation to the issuing bank that the transaction is complete. Without this, the funds are returned to the customer account as the hold has expired.
What are the benefits of credit card pre-authorisation?
It adds an extra step to the payments process, so why would a business be interested in credit card pre-authorisation? There are several benefits to consider.
It helps cut down on fraudulent chargebacks because the funds aren’t released for several days.
Most payment processors won’t charge a refund fee for pre-authorisations because the funds haven’t been withdrawn yet.
It postpones interchange fees until the authorisation goes through, so if the transaction is cancelled, you’re only liable for the payment gateway fee.
It appeals to customers who know their card won’t be charged until the order is shipped or other action is taken.
How does credit card pre-authorisation in Australia work?
Pre-authorisation can save money while testing if a card is valid. Here’s what credit card pre-authorisation in Australia looks like in terms of processing.
First, the customer provides their card details either online or at the point of service. The business charges a token test transaction, typically just $0.10 or so. During this time, the card is tested to ensure that customer address and account funds match and are valid. When the process is successful, the true transaction value may be run at that time or at the end of the holding period.
Not all merchant service providers offer credit card pre-authorisation in Australia, so you may need to shop around to find a gateway. You’ll be able to switch the feature on and off as needed.
How to pre-authorise a credit card
The first step is to determine whether your payment gateway offers pre-authorisation. If it does, you can set this up as the default option for future transactions. Go into your gateway settings to switch on pre-authorisation for the type of transaction you want it applied to. In some cases, this will be called ‘reserve’ rather than pre-authorisation.
One thing to keep in mind is that any merchants using pre-authorisation need to state this in the terms and conditions. You should include whether a third-party payment processor is used, the amount of money that will be taken, and the timeframe for payment.
GoCardless offers an additional way to manage payments without credit cards. Instead, we offer a BECS Direct Debit solution. Customers complete a Direct Debit Request to authorise payment, allowing merchants to pull funds from the customer’s bank account at the time of their choosing. You can manage payments either through the user-friendly online dashboard, with a custom API, or with one of our pre-built integrations.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.