Credit card pre-authorisations (commonly called pre-auths) benefit merchants in a number of important ways. They reduce fraud, increase customer satisfaction, and ultimately protect your bottom line. They are especially beneficial in a few specific industries.
What Is a Credit Card Pre-Authorisation?
A credit card pre-authorisation is a temporary hold placed on a customer’s credit card by the merchant, often with the intent of reserving funds for a future transaction. The hold usually lasts up to five days, but this can vary.
The funds cannot be spent as long as they’re on hold. The money still lives in the customer’s account, but it’s frozen in reserve. When it’s time to complete the transaction, the reserved funds can be captured, meaning that they’re taken out of reserve and processed as a payment.
For example, if a customer books a room at a hotel for £150, the property might place a £150 pre-auth on the customer’s credit card. If the card’s limit is £1,000, the customer would only be able to charge £850 to the card, even though the full £1,000 is technically still available. Once the customer checks out of the hotel, the property completes the £150 charge and closes the transaction.
Industries That Use Pre-Authorisations
A pre-auth is commonly used by businesses that book services in advance. If there is a delay between the times at which services are purchased and rendered, the pre-authorisation can benefit both the merchant and the customer.
Pre-auths are especially common in the hotel industry. In fact, hotels are known for two different types of pre-auths: those intended for bookings and those intended for incidentals and security deposits.
- When a guest books a room, the pre-authorisation for the room may take effect immediately; alternatively, it may be imposed at check-in and settled upon checkout.
- The second (usually smaller) pre-authorisation may be used to protect the hotel in the event of damages or cover the cost of items taken from the room (such as snacks from the mini bar) or basic amenities like spa service. If the guest leaves without using the amenities and the room is in good condition, this second hold is lifted.
Pre-authorisations are also common in the rental car business, largely for the same reason. These businesses have a finite number of cars available, and customers often book days or weeks in advance. The business needs to protect its interests and ensure that each customer is good for the money.
Basically, pre-auths are common in any industry where customers book ahead of time—especially in instances where the business has a limited number of bookings available. Tour operators, local service providers, and even reservation-based restaurants may make use of the pre-authorisation model.
Credit Card Pre-Authorisation vs Debit Card Pre-Authorisation
A pre-authorisation may be applied to a debit card or credit card, but the process is a bit different for each type of card. Credit card pre-auths subtract from the credit limit. Debit card pre-auths subtract from the total balance in the account.
Consider our previous example involving credit cards. If a customer has a credit limit of £1,000, and £150 is pre-authorised, the credit limit drops to £850. But if that same customer uses a debit card, the difference is applied to the balance rather than the credit limit. So if their current card balance is £1,000, the total balance remains unchanged, but the available balance drops to £850. The reserved £150 appears as a pending charge.
Depending on how the pre-authorisation is settled, the funds may ultimately be released or converted to a payment.
What Are the Benefits of Pre-Authorisation?
Though a pre-authorised credit card transaction benefits both the merchant and the customer, the primary purpose is to protect the merchant.
If you’re a business owner:
- A pre-authorisation protects you from chargebacks. If a customer books a hotel room and then decides to cancel two days before their reservation date, they might go straight to the bank to ask for a refund. This would be processed as a chargeback, exposing you to penalties and potentially placing your merchant account in jeopardy. But if the funds are simply being held in reserve, there’s nothing for the bank to refund. So you can simply release the funds while still remaining in good standing. You’re also spared from having to pay refund fees from the credit card companies.
- A pre-authorisation protects you from unreliable customers. By requiring customers to place money in reserve, you ensure that they’re actually able to pay for the services and are serious about the transaction. This is especially important when you have a limited number of bookings available. There’s nothing worse than having to turn customers away because you’re fully booked—only to discover that your reserved customers just decided not to go through with the transaction.
- A pre-authorisation protects you from theft and damage. By requiring a security deposit from every customer, you can ensure that you’re covered in the event of loss or damage. You don’t have to worry about that one problem customer skipping out on you; you’ve already got the money in reserve.
- A pre-authorisation reduces the number of MDR fees you have to pay. You have to pay a merchant discount rate (MDR) fee for each authorised transaction. But if you’re pre-authorising credit cards, you only have to pay for the transactions that complete the final payment. You don’t have to take a financial loss on customers who back out at the last minute.
And then, of course, there are the benefits to customers. If a customer does have to cancel for any reason, the refund process can be lengthy and frustrating. It can take days for the funds to reappear in their account. However, if the money is held in reserve, all you have to do is release the pre-authorisation. The funds will once again be available without hassle or delay.
How to Set Up Credit Card Pre-Authorisations
If you want to offer pre-authorisations, you first have to find a payment gateway that supports them. Then, as you set up your gateway, make sure that pre-auths are selected as a default option for transactions. Depending on your gateway, the option may appear as “Pre-Authorisation or “Reserve.”
If you use QPay Europe’s global payment gateway, we can help you to get set up in minutes. You’ll have the ability to customise your pre-authorisations and payment transactions in a way that best meets the needs of your customers and business.
Most current payment gateways are able to accommodate pre-authorised credit card transactions, as these payments have become an invaluable part of so many industries. If your business accepts reservations in advance, consider the ways in which a pre-auth payment option can benefit both your organisation and your customers.