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What is a credit card pre-authorization?


Question

What are a credit card pre-authorizations? Do they have any cost?

Answer

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Credit card pre-authorization means verifying that the credit or debit card has a positive balance on it without charging a cardholder for an operation that will be performed in a near future. Credit card pre-authorization is a very common practice in businesses related to reservations, such as hotels, restaurants, plane tickets etc. Its characteristics are the following:

  • The pre-authorizations are free which means that the cardholder does not get charged any extra commissions. At the same time, for the payment gateway there are some expenses related to pre-authorization but they are very insignificant. 
  • The merchant does not charge the cardholder at the moment of the reservation of a service, instead he uses pre-authorization to see if the customer is solvent and what brand of card he is using.
  • The cardholder will not see any pre-authorization notification in its bank statements, he will only see the final charge.
  • The payment gateways can proceed with the pre-authorizations in two ways: withholding temporary the funds of the client and without any withhold. 

Credit card pre-authorizations is a common practice used by the companies to assure a secure sale and further ability of the client to face the expenses. In case of pre-authorization that involves the withhold of the funds, the client won't be able to use them until he pays for the services the total required amount. This blocking of the funds is usually applied to new clients, when their purchasing power was not verified yet. For example, imagine that it is the first time you book a hotel room with Booking, the modus operandi of the MID goes through the following logic:

  • Booking sees that a new customer has registered in their database and has provided his Visa, MasterCard or Amex card details to make the reservation.
  • Once the data is received, Booking virtual POS can perform the following pre-authorizations that involve blocking of the funds:

A) It charges you for the amount of 1 euro to verify if the card is yours and its has a positive balance. Then once you leave the hotel, the POS will make the final charge of the total amount due for the reservation and within 2-5 days it will refund the pre-authorized charge of 1 euro to the same card.

B) If the mount of the transaction is high, the POS can temporarily block 50% of the total cost due for the room reservation but will not make the final charge until you check in the hotel. What does this mean? That means that you will begin to have the debt on your card the day you leave the hotel and not the day that the company made the pre-authorization with blocking.

C) The case that presents more disagreements among the customers is when the company performs a 100% pre-authorized block. The operation is the same as described in case B but with the total reservation. You will see the final charge on the card the day you leave the hotel.

As you can see in these 3 cases pre-authorization is a financial techniques that companies apply to assure the purchase and force the client to continue with the contracted services.

Advantages of pre-authorizations with blocking funds

The advantages that a company when pre-authorizing a purchase are the following:

  • The company gets to know if the customer has a credit or debit card. Although it seems irrelevant, this is a valuable information. 
  • Know if the customer is going to pay by Visa, MasterCard, Amex, Dinners Club, JCB or Discover, as in the previous case, this data is used to make the payment in a POS with lower commissions.
  • The risk of reversal transactions or chargebacks decreases since there is a prior analysis of fraud with the pre-authorization of 1 euro obtaining the information about client's card number, brand of card, expiration date, customer billing information, country of issuance of the card, name of the bank and CVC.
  • The sale is guaranteed for 99.99%. Once the POS terminal has made a pre-authorization with blocking the funds, it is very difficult to reverse an operation. Incase the client wants to cancel the reservation, he will be charged additional fees and it wont be for free for him. 
  • Refund of blocked pre-authorizations take from 3-5 days only. 

Credit card pre-authorization



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