An authorization hold is a temporary hold placed on a credit or debit card by a merchant. This hold reduces the available balance without charging the account until the transaction is finalized or canceled. Authorization holds are used in various industries, such as hotels, gas stations, car rentals, and e-commerce, to ensure that the customer has enough funds. In this article, we explain how these holds work, their role in reducing risks, and the specifics of their use across industries.
How Authorization Holds Work
Authorization holds follow a direct process:
- Transaction Initiation: The cardholder initiates a transaction.
- Hold Placement: The merchant’s payment processor requests an authorization from the cardholder’s bank.
- Funds Reserved: The bank reduces the available balance by the hold amount but doesn’t transfer funds yet.
- Completion: Once the service or product is delivered, the hold converts into a charge, and funds are debited from the account.
According to VISA, most authorization holds last between 1-7 days, although some, like hotel reservations or car rentals, can last up to 30 days.
| Step | Description |
|---|---|
| Transaction Initiation | The cardholder starts the transaction. |
| Hold Placement | The merchant requests authorization from the cardholder’s bank. |
| Funds Reserved | Funds are temporarily reduced in the account but not yet charged. |
| Completion | The merchant captures the amount, turning the hold into a charge. |
| Hold Expiration | If the transaction isn’t finalized, the hold expires and releases. |
Why Merchants Use Authorization Holds
Authorization holds are essential for merchants to secure transactions and manage risks.
- Fraud Prevention: By placing a hold, merchants verify the cardholder’s funds, preventing fraudulent transactions.
- Chargeback Prevention: An authorization hold ensures that the funds are available before the transaction is completed, reducing the risk of chargebacks.
- Inventory Control: Hotels and car rental companies use holds to ensure that a room or vehicle is reserved without upfront charges.
Drawbacks for Consumers:
- Reduced Balance: The hold temporarily decreases the available balance on the account, which can limit purchasing power.
- Confusion: Some cardholders may mistakenly think they’ve been charged twice.
Use of Authorization Holds in Different Industries
Authorization holds are applied in multiple industries for specific purposes.
Hotels:
- A hold is placed for the cost of the stay plus potential additional charges (e.g., minibar usage, damage deposits). This can last up to 30 days.
Car Rentals:
- Car rental companies hold a significant amount to cover potential damages or excessive mileage, with holds sometimes lasting for 30 day.
Gas Stations:
- Gas stations often place pre-authorizations for an estimated amount of $50 to $100, which ensures that the customer can cover the cost of fuel. The hold typically lasts 1-3 days.
Duration of Authorization Holds
The length of an authorization hold depends on the merchant’s industry and the bank’s policies. For most industries, holds expire within 1-7 days. However, some services, such as car rentals and hotels, may extend holds up to 30 days.
| Industry | Typical Hold Duration | Purpose |
|---|---|---|
| Hotels | Up to 30 days | Covers room cost, potential damages, and extra services. |
| Car Rentals | Up to 30 days | Covers potential damages or additional charges. |
| Gas Stations | 1-3 days | Pre-authorizes estimated fuel amount. |
| E-commerce | 1-7 days | Ensures funds for pending online transactions. |
How Authorization Holds Help Prevent Chargebacks
Chargebacks occur when customers dispute a transaction, often claiming they didn’t authorize the charge or that they didn’t receive the product. According to Mastercard, chargebacks cost merchants $125 billion annually. Authorization holds act as a buffer for merchants, verifying funds before finalizing a sale. By ensuring funds are available and the cardholder agrees to the hold, chargebacks can be reduced.
Merchanto.org, an official partner of VISA and MasterCard, provides chargeback prevention services. Merchants can protect themselves from chargebacks through fraud detection tools. Learn more about Merchanto.org’s services here.
Advantages and Drawbacks of Authorization Holds
Advantages for Merchants:
- Fraud Prevention: Ensures the customer has sufficient funds before completing the transaction.
- Chargeback Protection: Reduces the risk of chargebacks by securing funds in advance.
- Inventory Control: Helps merchants reserve inventory (rooms, cars) without immediate payment.
Drawbacks for Consumers:
- Temporary Balance Reduction: The hold reduces available balance until it’s released, limiting the cardholder’s spending ability.
- Customer Confusion: If not clearly communicated, holds can be mistaken for actual charges, leading to disputes.
Examples of Authorization Holds
Authorization holds vary across different sectors:
- Hotels often hold an estimated amount of $100-$500, which covers room charges and incidentals.
- Car Rentals typically place holds of $200-$500 to account for any potential damages.
- Gas Stations authorize around $50-$100 to ensure funds are available for fuel.
| Sector | Hold Amount | Hold Duration | Purpose |
|---|---|---|---|
| Hotels | $100 – $500 | Up to 30 days | Covers room cost and additional charges. |
| Car Rentals | $200 – $500 | Up to 30 days | Covers potential damages or mileage overages. |
| Gas Stations | $50 – $100 | 1-3 days | Ensures funds are available for fuel purchases. |
| E-commerce | Transaction value | 1-7 days | Verifies funds for pending transactions. |
Tips for Consumers Regarding Authorization Holds
While authorization holds are standard for card transactions, consumers can take steps to manage their funds more effectively.
- Monitor Account Balances: Track pending transactions to avoid confusion over available balances.
- Understand Merchant Policies: Know how long holds last, especially in industries like hotels and car rentals.
- Set Alerts: Use bank alerts to notify you when a hold is placed and when it’s released.
Authorization Holds in E-commerce
In e-commerce, authorization holds ensure that funds are available before the transaction is finalized. Stripe, a global payments platform, outlines how holds typically last 1-7 days, giving merchants time to process and ship goods before capturing the payment. This minimizes the risk of fraud or disputes, as only verified transactions proceed to settlement.
Impact of Authorization Holds on Credit and Debit Cards
Authorization holds reduce the available balance but do not immediately show as charges on a cardholder’s statement. For debit cards, this can create a risk of overdrafts if a hold is higher than expected. For credit cards, it temporarily raises the credit utilization ratio, which can affect credit scores.
| Card Type | Effect of Authorization Hold |
|---|---|
| Credit Card | Temporarily reduces available credit; impacts credit utilization. |
| Debit Card | Reduces available balance; may trigger overdrafts if not monitored. |
Conclusion
Authorization holds play a critical role in managing transaction risks. Merchants benefit by securing funds upfront, preventing chargebacks, and managing inventory. Consumers, on the other hand, need to monitor their accounts closely to avoid confusion and ensure that holds are properly released.
This article has covered the key aspects of authorization holds, backed by data and industry practices, ensuring both merchants and consumers understand their purpose and impact.
