A pre-authorization is a temporary hold placed by a provider on a customer’s credit card that reserves funds for a future payment transaction.

billwerk integrates Adyen | Pre-Authorization | Press Release

What is a pre-authorization?

Credit card pre-authorization, or authorization hold or pre-auth for short, is an important and useful method for merchants to accept payments in person or online, and thus offers many advantages. Pre-authorization of payments can guarantee payment for the products or services used. It saves merchants time and money by avoiding fees for refunds and the hassle of processing chargebacks (chargebacks). A pre-authorization is essentially a temporary hold made by a service provider on a customer’s credit card that reserves funds for a future payment transaction. This is also known as a reservation period.

How pre-authorization works

Pre-authorization is carried out with the credit card. The provider of the product or service requests the customer’s card and submits a pre-auth transaction. In a certain period of time, which can vary, the same company can confirm or cancel the pre-auth transaction. More precisely, part of the customer’s credit limit is reserved for a certain period of time and confirmation of the authorization hold is ensured at the end of the service provision. Until then, the business must maintain the pre-auth limit until a confirmation transaction is completed. In this way, businesses must keep the authorization code valid for the same period of time.

What does the pre-authorization solution allow the company to do?

The pre-authorization solution enables the company to:

  • Pre-authorization application – Pre-authorization is an application for an authorization that still has to be confirmed after approval by the issuing bank;
  • Cancellation of a pre-authorization request – To cancel a pre-auth transaction, companies must submit a reverse pre-authorization transaction;
  • Confirmation of a pre-authorization – in the confirmation, the values of the request and the final confirmation are matched and the final value is sent by the company to the responsible bank
  • Cancelling a pre-authorization confirmation – it can normally only be cancelled on the same day as the customer purchased the product or service.

The advantages of pre-authorization

One of the biggest benefits of pre-authorization is that it can significantly reduce the possibility of fraud, reduce processing costs and pre-authorization also contributes to better customer satisfaction.

Example: If money is taken from the customer’s credit card and products are not delivered on time, this can make the customer dissatisfied and angry. In most cases, when the merchant uses pre-authorization, the credit card is charged after the goods have been delivered to the customer. Authorization hold is therefore great for improving the overall customer experience, especially in cases where the products are not ready to be shipped at the time of purchase.

Most payment processors automatically notify customers online of failures by displaying a message about why their transaction was not completed. On the other hand, a merchant can see the cause of the failure, identified by its error code. Error codes can vary depending on the shopper. They can be technical problems or problems with the information sent to the processor, such as incorrect configuration, missing values in the online form, etc. In many cases, the error codes usually relate to a client’s account. In Subscriptions, for example, pre-authorizations are used to reserve the customer’s credit and inform them in advance if something is wrong with their account.

Conclusion: Pre-authorization ensures satisfied customers and facilitates fraud detection

Without pre-authorization, the data would only be checked for accuracy during the actual payment process. The acquirer authorises the card transaction and establishes the link between the issuing banks and the merchant. If this authorization fails, the transaction turns out to be much more complicated.

Therefore, the security for the merchant is much higher with credit card pre-authorization. It is a confirmation that the customer has sufficient credit on the card to pay for the transaction. This is authorization by a credit card processor. If the customer’s details are correct and there is sufficient credit on their account, the amount specified is withheld and then deducted from the customer’s credit limit. Authorization hold thus provides greater security for the business and the customer receives a guarantee of product or service availability in return.

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in Wiki: Billing & Payment