Authorization hold
Encyclopedia
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 (also called settlement
), or the hold "falls off." In the case of debit card
s, authorization holds can fall off the account (thus rendering the balance available again) anywhere from 1–5 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 (non-PIN-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 (or bank balance, in the case of a debit card) 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.
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 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 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.
website, authorization holds often appear in the "pending transactions" section of the balance sheet. As stated above, authorization holds only last for a fixed maximum period of time. So, if an individual made the $30 purchase listed above, and their bank only kept that authorization hold in place for 1 business day, then the individual would see the funds as a pending transaction for that first day. If the merchant failed to present the item for payment within that first day, the authorization hold would "fall off" and the funds would appear to be available again. If the merchant then presented the item for payment 2 days later, the $30 transaction would "reappear" and actually be debited from the account at that time. This causes some issues with overdraft
fees, as customers who rely solely on the online (or ATM
) balance may not be taking into account transactions for which the authorization hold has fallen off. This creates a false impression of the balance, and can cause the customer to spend more than they actually have in the account.
, Zip Code
, or address and incorrect information is provided or it's mistyped. Gasoline pumps often impose a double hold, one for a standard amount (such as $75) 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 (for a debit card) overdrafts.
Rarely, banks will remove authorization holds with a verbal (or for larger amounts, written) request from the authorizing merchant. Such requests usually require information such as the cardholders 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 insure the charge will not settle, they require the hold to remain according to their bank policies. They usually find other ways to assist their customers depending on their relationship with the bank.
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 (usually between $75.00 and $100.00) 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 (such as the estimated rental charges plus 15% or $250 — a policy many customers are not aware of). 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 card
s, 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.
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
of authorizing electronic transactions done with a debit card
Debit card
A debit card is a plastic card that provides the cardholder electronic access to his or her bank account/s at a financial institution...
or credit card
Credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
and holding this balance as unavailable either until the merchant clears the transaction (also called settlement
Settlement (finance)
Settlement of securities is a business process whereby securities or interests in securities are delivered, usually against payment of money, to fulfill contractual obligations, such as those arising under securities trades....
), or the hold "falls off." In the case of debit card
Debit card
A debit card is a plastic card that provides the cardholder electronic access to his or her bank account/s at a financial institution...
s, authorization holds can fall off the account (thus rendering the balance available again) anywhere from 1–5 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 (non-PIN-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 (or bank balance, in the case of a debit card) 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.
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 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 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.
Cancelling an authorization hold
An authorization hold can be canceled by the merchant if the merchant uses an acquirer that supports a process known as authorization reversal. Different acquirers place different restrictions on the conditions that must be met for the merchant to make an authorization reversal, but it is typical that the reversal must be made very shortly (generally within a minute) after the original authorization. In cases where the merchant cannot perform a reversal, but wishes to cancel the authorization it is typical that the merchant would contact the acquirer by telephone.Confusion in online banking
When viewing an online bankingOnline banking
Online banking allows customers to conduct financial transactions on a secure website operated by their retail or virtual bank, credit union or building society.-Features:...
website, authorization holds often appear in the "pending transactions" section of the balance sheet. As stated above, authorization holds only last for a fixed maximum period of time. So, if an individual made the $30 purchase listed above, and their bank only kept that authorization hold in place for 1 business day, then the individual would see the funds as a pending transaction for that first day. If the merchant failed to present the item for payment within that first day, the authorization hold would "fall off" and the funds would appear to be available again. If the merchant then presented the item for payment 2 days later, the $30 transaction would "reappear" and actually be debited from the account at that time. This causes some issues with overdraft
Overdraft
An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. In this situation the account is said to be "overdrawn". If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft...
fees, as customers who rely solely on the online (or ATM
Automated teller machine
An automated teller machine or automatic teller machine, also known as a Cashpoint , cash machine or sometimes a hole in the wall in British English, is a computerised telecommunications device that provides the clients of a financial institution with access to financial transactions in a public...
) balance may not be taking into account transactions for which the authorization hold has fallen off. This creates a false impression of the balance, and can cause the customer to spend more than they actually have in the account.
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 CVVCVV
CVV may refer to:* Card Verification Value, also known as Card security code, a security feature for credit cards* Carl Van Vechten , Harlem Renaissance photographer and portrait artist* Citrus variegation virus, a disease affecting citrus trees....
, Zip Code
ZIP Code
ZIP codes are a system of postal codes used by the United States Postal Service since 1963. The term ZIP, an acronym for Zone Improvement Plan, is properly written in capital letters and was chosen to suggest that the mail travels more efficiently, and therefore more quickly, when senders use the...
, or address and incorrect information is provided or it's mistyped. Gasoline pumps often impose a double hold, one for a standard amount (such as $75) 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 (for a debit card) 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 (or for larger amounts, written) request from the authorizing merchant. Such requests usually require information such as the cardholders 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 insure the charge will not settle, they require the hold to remain according to their bank policies. They usually find other ways to assist their customers depending on their relationship with the bank.
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 (usually between $75.00 and $100.00) 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 (such as the estimated rental charges plus 15% or $250 — a policy many customers are not aware of). 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
MasterCard
Mastercard Incorporated or MasterCard Worldwide is an American multinational financial services corporation with its headquarters in the MasterCard International Global Headquarters, Purchase, Harrison, New York, United States...
-branded debit card
Debit card
A debit card is a plastic card that provides the cardholder electronic access to his or her bank account/s at a financial institution...
s, 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
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
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.