Credit/debit authorisation holds explained

If you’ve ever stayed in a hotel or filled up at a petrol station, you’re probably familiar with the concept of holding credit card authorisation. It’s how the hotel protects itself in case you decide to empty the minibar and how the petrol station ensures you don’t end up filling your car up with more petrol than you can afford.

But while these kinds of holds are common, should more businesses be using credit card authorisation holds as a more flexible tool? Can they be used to protect merchants against chargebacks and other problems?

What is an authorisation hold?

Whenever you make a card payment, an authorisation process must happen to verify the identity and validity of the user and transaction. The party processing the payment sends the information to the issuing bank and the bank declares whether the account is genuine and if the cardholder has enough funds or credit to cover the purchase.

Most transactions take place in a matter of seconds but merchants have the option to place a hold on the authorisation process. This allows them to lock in funds owed to them until payment is finalised and the money transferred from the cardholder’s bank (the issuing bank) to the merchant’s bank (the acquiring bank).

When and why you should use an authorisation hold

When it comes to hotels, petrol stations and vehicle rental services, the benefits of authorisation holds are obvious. In these sectors, the final price can vary and be difficult to predict due to several extraneous factors. The authorisation hold gives the merchant greater control over their business and means they are taking on fewer risks.

But it’s a process that’s incredibly useful in e-commerce. For example, it lets e-commerce merchants delay processing and finalising a payment until they are convinced it is legitimate and the buyer has enough funds available to them. It also protects them against fraud by placing suspect transactions on hold until they are satisfied.

It’s also useful for any merchants that commonly see a lot of chargebacks or product returns. Because if the buyer has a problem with the item or wishes to return it, the merchant can simply lift the hold rather than issuing a refund or suffering a chargeback later on. This is also why GoCardless offers Instant Bank Pay, which provides merchants with real-time confirmation that funds will be transferred. This is ideal for initial payments such as set-up fees or deposits.

How long can a merchant hold an authorisation?

How long you can hold an authorisation depends on the card network, the type of card used and your merchant category code (the kind of business you’re operating). Typically, a debit transaction can be held for up to a week but for credit transactions the hold can last as long as a month. This is typical for those in equipment or vehicle rental. Asking how long an outstanding authorisation hold lasts is like asking how long is a piece of string.

Being aware of the hold time limit is useful as you’ll need to resubmit the transaction for processing if it’s not settled in that time. Some credit card companies also impose misuse fees for transactions not settled within the limit. This is good news for consumers but bad news for merchants that might wait to charge an account until after an item has been shipped.

Generally speaking, while there are potentials for problems such as time-limit discrepancies, inaccurate records and double holds, they are rare. Nine times out of ten, the hold is automated by the bank and you won’t even know it’s happening. But it’s always good to know you’re protected.

We can help

If you’re interested in finding out more about credit card authorisation holds, or any other aspect of your finances, then get in touch with our financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.