Authorization hold is the practice within the banking industry of
authorizing electronic transactions done with a debit card or credit card and
holding this balance as unavailable either until the merchant clears the
transaction, or the hold "falls off." In the case of debit cards, authorization
holds can fall off the account anywhere from 1–8 business days after the
transaction date depending on the bank's policy; in the case of credit cards,
holds may last as long as 30 days, depending on the issuing bank.
Signature-based credit and debit card transactions are a two-step process,
consisting of an authorization and a settlement.
When a merchant swipes a customer's credit card, the credit card terminal
connects to the merchant's acquirer, or credit card processor, which verifies
that the customer's account is valid and that sufficient funds are available to
cover the transaction's cost. At this step, the funds are "held" and deducted
from the customer's credit limit but are not yet transferred to the merchant. At
the end of the day, the merchant instructs the credit card machine to
submit the finalized transactions to the acquirer in a "batch transfer," which
begins the settlement process, where the funds are transferred from the
customer's accounts to the merchant's accounts. Contrary to popular belief,
this process is not instantaneous: the transaction may not appear on the
customer's statement or online account activity for one to two days, and it can
take up to three days for funds to be deposited in the merchant's account. The
money will be refunded in full if the hold is allowed to expire before the
settlement occurs. For example, if an individual has a
credit limit of $100 and uses a credit card to make a purchase at a retail
store for $30, then his or her available credit will immediately decrease to $70.
This is because the merchant has obtained an authorization from the
individual's bank by swiping the card through its credit card terminal. If the
billing statement was sent out at that point, the actual charges would still be
$0, because the merchant has not actually collected the funds in
question. The actual charge is not put through until the merchant submits their
batch of transactions and the banking system transfers the funds.
A debit card works slightly differently. Similar to the previous example, if one
has a balance of $100 in the bank and used a debit card to make a purchase at
a retail store for $30, then his or her available balance will immediately
decrease to $70 as a hold on the $30 is enacted. This is because the merchant
has obtained an authorization from the individual's bank by swiping the card
through its credit card terminal. However, the actual balance with the
bank is still $100, because the merchant has not actually collected the funds in
question. However, unless this authorization hold expires without being
finalized the user cannot access that part of their account. The actual
balance will not be reduced until the merchant submits their batch of
transactions and the banking system transfers the funds.
Problems = Delayed Service Payments =
Some services, specific examples are Hotels and Rental cars, the card is
authorized at the beginning of service, but the settlement will not be placed
until the completion of the service. Many times there are additional deposits
required in addition to the anticipated cost of the service, to cover any
additional unexpected charges for damages, excessive mileage or gas, or if
hotel guests charge room service, movies, phone calls to the account. Upon
the completion of the service, the vendor will then process the settlement
of any final charges and submit them to the processor. It is not until this time
that the vendor will receive any funds, even though the customer's account would
have shown the pending transaction from the authorization at the beginning of
service. The settled charges will be deducted from the authorized funds, and
are not in addition to the authorized funds.
= Double holds = On occasion, due to negligence or
computer error, a merchant may attempt to authorize a card twice, creating a
double hold on the cardholder's bank account. This often happens when a
processor requires additional security verification such as a CVV, ZIP code, or
address and incorrect information is provided or is mistyped. Gasoline pumps
often impose a double hold, one for a standard amount and another for the
amount of purchase. Though the merchant will only clear the transaction once,
the hold will temporarily lower the customer's available balance,
potentially causing declines or overdrafts.
= Voided transactions = Some banks allow the removal of a hold
from an account by the merchant. However, many banks do not, and a
merchant may not have the capability to do so. Thus a merchant may void a
transaction, but the hold will remain on the account.
Rarely, banks will remove authorization holds with a verbal request from the
authorizing merchant. Such requests usually require information such as the
cardholder's name, card number, authorization number and transaction
amount. Due to the fact that most banks cannot verify that the letter from the
merchant is someone who has authority to ensure the charge will not settle, they
require the hold to remain according to their bank policies.
= Holds for differing amounts = Another issue that occurs on a regular
basis with authorization holds is when the transaction amount changes between
when the hold is placed on the account, and when the transaction is settled.
This most commonly occurs in situations where the final debit amount is
uncertain when the authorization is actually obtained.
For example, if an individual makes a gasoline purchase by swiping their check
card or credit card at the gas pump without using their PIN, then the pump
has no way of knowing how much gas will be used. The pump typically authorizes a
fixed amount, usually $1 but sometimes up to $100, to verify that the card is
legitimate and that the customer has funds available. When the transaction is
settled, it will actually post for the value of the purchase.
There currently is litigation in the State of Florida which alleges that some
gas stations do not adequately inform their customers that a certain fixed
dollar amount will be requested as a pre-authorization in connection with a
customer's purchase of self-service gasoline at the pump using either a
checkcard or debit card and that this practice violates various Florida
consumer protection and civil laws. The lawsuit was filed by Florida attorneys
Cameron Moyer and James Staack in November, 2007. Class certification was
granted by the Circuit Court in February, 2009. The Defendant is
currently appealing the Class Certification Order.
Another example can be seen with a restaurant transaction. If an individual
spends $40 at a meal, the server does not know how large a tip they will
leave, if they choose to leave one on the card. The restaurant's credit card
terminal is typically set to authorize a larger amount, such as 20% above the
cost of the meal, but the transaction will settle for the actual total
including the actual tip written on the receipt. Some restaurants will authorize
just the amount of the bill but the transaction will settle higher with the
tip included. Acquirers sometimes forbid the practice of preauthorizing an amount
including a tip, but will guarantee settlement of the amount authorized plus
15 or 20%. Other establishments that may settle
transactions for different amounts than were originally authorized include
hotels and car rental agencies. The final cost of these transactions can be
extremely unpredictable due to unforeseen extras such as room service
charges, refuelling charges, or longer stays. These companies typically place a
hold on the customer's credit card at the beginning of the transaction for the
estimated total plus a percentage or a fixed dollar amount. These types of
establishments usually do not settle the transactions until after the customer
has checked out or returned the rental car. Some hotels and car rental agencies
do not accept Visa or MasterCard-branded debit cards, as the authorization holds
can expire before the transaction is settled. Additionally, some of these
agencies use the requirement of a credit card as a tool to screen high-risk
customers, as credit cards usually require a good credit history, while all
that is needed for a debit card is a checking account.
Another example of a transaction that may settle for an amount different from
the amount authorized is a transaction incurred in a currency different from
the currency the card is denominated in. In that case, the final, settled,
transaction amount will be based on the exchange rate in effect on the
settlement date. As that rate is generally not known at the time of
authorization, for authorization purposes the banks will use an estimated
amount based on the exchange rate at the time of authorization.
External links Visa International Operating Regulations
References Bank of America. Card Processing Basics.
Retrieved September 27, 2006. This link is no longer available and needs
updating ^ Christopher Solomon. "Hosed at the gas
pump -- by your debit card". MSNBC. Retrieved 2010-05-23.
^ For an example of this, see the section entitled I have been charged for
my order but it hasn't been despatched at http:www.bbcshop.comfaq.
^ Snopes.com. Station Break, by Barbara and David Mikkelson. April 24, 2005,
retrieved September 27, 2006. ^ Grillasca & Mayzik v. Hess Corp.,
Sixth Judicial Circuit Court in and for Pinellas County, Fl. Case Number:
07-011610-CJ-21