Pre-authorization charge (or pre-auth for short) is a transaction involving a temporary hold on a customer’s card. The hold helps to verify that the customer’s card is valid and has sufficient funds to cover the pending transaction without charging the customer’s account upfront.
A pre-auth charge works differently compared to a non-pre-auth charge. When a non-pre-auth payment is made, the issuer debits the customer for the payment once the customer authorizes the transaction. This complicates the dispute resolution process for both merchants and customers, as immediate debits are initiated following authorization.
These non-pre-auth transactions are concluded swiftly and the merchant receives the funds in line with the settlement schedule. This is not the case in a pre-auth charge transaction as the customer is not debited immediately after authorizing the transaction, instead, a hold (or lien) is put on the transaction.
This hold will be lifted only after any of these three conditions are met:
- The merchant has captured the transaction leading to the debit on the customer’s account.
- The merchant has voided the transaction, usually due to a dispute on the transaction.
- The hold has expired after the valid hold period (7 working days), in this case, the hold on the funds is released and the customer is not debited.
Only after the merchant has captured the transaction can they expect settlement for the transaction. The pre-auth charge hold lasts for seven days after which, it is released and the merchant needs to re-initiate the transaction to debit the customer.
Benefits Of A Preauthorization Charge
Some of the benefits a pre-authorization charge offers businesses are:
- Reduced Disputes And Refunds: Pre-auth charge transactions are a great way to mitigate major payment risks like disputes and the accompanying fees like refunds, and merchant discount rate (MDR) fees.
- Reduced Fraud: They also help reduce fraud for merchants, providing greater transparency and preventing hidden charges for customers.
- Reduced Chargeback: Pre-auth charge is an effective way of mitigating the occurrence of chargebacks. If you have not captured the funds yet, your customer cannot issue a chargeback claiming that the transaction was fraudulent.
- Guaranteed Payments: Pre-auth charge ensures payment for services or products. When funds are held, they can’t be used, ensuring availability for the transaction. This is beneficial for businesses like hotels, hospitals, and car rentals to cover additional charges or damages.
- Better Customer Experience: In the event of any service-related issues or product unavailability, releasing the funds can effectively make the customer less frustrated, leading to a pleasant experience.