How Do Pre-Authorizations Work?

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Card pre-authorization is a useful practice for merchants in the travel industry, as it gives them a security guarantee, ensuring that customers pay for the services they use. It can also save money. But, how do pre-authorizations work?

Many merchants don’t know exactly what pre-authorizations are, and are therefore hesitant to use them. Here is a brief overview of what pre-authorization is, and how it can benefit your business.

What is a pre-authorization?

Pre-authorizing a credit card puts a temporary hold on some of a customer’s funds. The hold lasts approximately five days, depending on your MCC – merchant classification code. The customer can’t withdraw the money from an ATM or spend the money elsewhere while the hold is in place. However, no money is actually debited when a card pre-authorization takes place. When it comes time for the customer to pay, the funds on hold can then be ‘captured’, that is, converted to a charge.

Pre-authorization is often used in hotel scenarios. Either at the booking stage, or during check-in, the merchant can pre-authorize the customer’s credit card. This guarantees that there are funds available to pay for any charges incurred during the hotel stay, such as the cost of room service or other amenities. It ensures that the customer cannot leave without paying.

Upon check-out, these funds are converted to a charge. If the customer wishes to pay using another card, or a different payment method, the pre-authorization can be cancelled and the hold on funds cleared within a number of days.

Pre-authorizations are also often used by car rental companies to ensure the car is returned in good shape and with a full tank of gas, and by tour operators and activity providers, when entrusting a customer with an expensive piece of equipment, such as a bicycle. In these cases, the pre-authorization is also sometimes referred to as a ‘security deposit’. It ensures that there are funds available to cover damage or theft.

The pre-authorization process

Carrying out a pre-authorization is easy when working with a turnkey payment solution. For online payments, there are two simple steps involved:

1. Setup your online site to accept pre-authorizations instead of full authorizations.

Your shopping cart software should include an option where you can choose to process pre-authorizations. Then, when a customer makes a booking through your online site, the transaction will be processed as a pre-authorization, and a hold will be put on the customer’s funds.

2. Capture the funds.

This can be done through your credit card processing platform. The pre-authorization will be converted to a charge. You may also be able to capture payments from within the shopping cart software interface.

If you are accepting payments over the phone using a virtual terminal, the terminal should display an option where you can choose between authorization and pre-authorization. After choosing ‘pre-authorization’, continue the process as normal by entering the customer’s card details. Remember to capture the payment through the control panel, later, when the time comes.

As a merchant, there are two important best practices you should employ to ensure that the pre-authorization process goes smoothly:

  1. Tell the customer that you are pre-authorizing their card, and let them know the amount of the pre-authorization. Make sure they understand how long the pre-authorization will last.
  2. Capture any payments before the 5th day, while the funds are still being held. After the pre-authorization expires, the funds are released back to the cardholder. This should be avoided, as you would then have to contact the cardholder again to process a new payment.

What are the benefits of pre-authorization?

Pre-authorizations can reduce fees, while also providing your customer with a good experience. Here are the main benefits of pre-authorization for both your business and your customers:

1.      Ensures customers pay for their services.

By putting a hold on customer funds, you never have to fear that a customer will leave without paying for the services they used.

2.      Avoids chargebacks.

Pre-authorizations are an easy way to prevent chargebacks. If funds have not yet been captured, the cardholder cannot issue a chargeback.

3.      Avoids MDR fees.

Many credit card issuers do not charge an MDR (merchant discount rate) fee unless a transaction is fully authorized.

4.      Avoids refund fees.

Many card processors charge a fee for refunds. If you haven’t captured the payment yet, you can simply cancel the pre-authorization and no refund is needed, so no fees are incurred.

5.      Improves customer satisfaction.

In some situations, you may find that you have to cancel customer bookings after they have been made. If a customer has already paid for their booking, this can make them unhappy. When using pre-authorizations, there is no payment to refund. This can reduce the customer’s dissatisfaction.

Accepting pre-authorizations is easy and provides you with a host of worthwhile benefits, reducing your costs and increasing customer satisfaction too. Pre-authorizations are a simple yet valuable practice that every merchant in the travel industry should take advantage of.

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