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What is a credit card pre- authorisation?

GoCardless
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Last editedNov 20222 min read

If you run a business which sells goods and services to the public, it’s best to accept as many different payment options as possible. Despite the growing range of options, credit and debit cards are still the preferred choice for many customers, so it is wise to understand exactly how payment cards work. A key part of this understanding means knowing what a credit pre-authorisation is and how the process can help your business.   

Credit card pre-authorisation in the UK

The term credit card pre-authorisation is sometimes referred to as ‘pre-auth’ or ‘authorisation hold’. It refers to a temporary hold being placed on a customer’s credit card. In most cases, this hold lasts for a period of 5 days, but the exact length of time can vary. In effect, the length of time a credit card pre-authorisation lasts is determined by the Merchant Category Code (MCC) used by the credit card company to classify your business. As a general rule, a credit card pre-authorisation shouldn’t be extended for too long, as the customer might shift their funds, meaning the transaction can’t be covered.   

The thinking behind the credit card pre-authorisation process

The process of credit card pre-authorisation is designed to protect both the customer and you. Once the amount of money in question has been placed under a temporary hold, it is locked into the customer’s account and can therefore not be spent on anything else. The process is similar to what takes place when a cheque is paid into an account and the amount appears in that account prior to the cheque clearing, without actually being available to spend. 

From the customer’s point of view, if you fail to complete a post-authorisation during the defined holding period, then the funds being held will be re-issued to the customer by the bank. The post-authorisation is the official confirmation of the pre-authorised transaction. A pre-authorisation which is then not subject to a post-authorisation expires and is known as a ‘falling off’.   

Advantages of the credit card pre-authorisation process

Fraud protection 

One of the key advantages of using the credit card pre-authorisation process is the degree of protection it offers from fraud, and in particular chargebacks resulting from fraud. In simple terms, if you place a pre-authorisation hold on a transaction which has been made with a fraudulent card, the customer is prevented from issuing a chargeback for the transaction (a common form of fraud) because the funds never actually leave the account. From your point of view, this can save you the risk of fines, the burden of extra administration and the reputational damage of constantly being hit for chargebacks. Protection of this kind is particularly important if you do a lot of your selling online. 

Reduced transaction costs

When a pre-authorisation hold is put on a credit card transaction, the interchange fees for that transaction won’t be charged until the post-authorisation is confirmed. This means that if the transaction is cancelled before the full authorisation happens, the interchange fees won’t have been charged. You only have to pay the payment gateway fee.  

Reduced refund fees

Payment processing often involves having to pay a fee if a refund is needed. Cancelling a pre-authorisation – because a customer changes their mind, for example – doesn’t involve a refund fee, because the funds were never actually withdrawn and therefore don’t need to be refunded. 

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