What is credit card authorization hold?

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Authorization hold is a technique, which can be used in order to restrict the transfer of funds. Merchants have the right to use this option for one or more transactions for a temporary period. This is done to ensure that merchants are getting their payment into their account, which is made by a credit or a debit card. There are two steps, which are involved in the completion of making payment through a card. Firstly, the purchase is authorized and then the transaction is settled. The authorization process tells the merchant that funds are available for a particular transaction. After the payment is made by a card, the merchant has to contact the issuing bank to receive an authorization code. Here are the responses that the merchant will receive.

Responses from the issuing bank

Approved

It means that the account has sufficient funds and there is no loss of card nor the card has been stolen.

Approved Partial

It means that the card is neither lost nor stolen but there is insufficient balance to carry out the transaction.

Declined

It means that the account is not in a good condition and card has been lost or stolen. It may also mean that the account has insufficient balance to carry out the transaction.

Referral

It means that there is some problem with the card and the issuing bank must be contacted to resolve the issue.

Incorrect PIN

It means that the transaction has been cancelled, as the PIN is incorrect.

Expired Card

This means that the card has been expired and the customer has to re-enter the expiry date to complete the transaction successfully.

Pick Up Card

This is a response in the case of lost or stolen card. The customer has to get the physical card from the issuing bank.

Working of Authorization Hold

There are many industries that make use of the authorization like hotels, gas pumps etc. Here are the steps in which the authorization hold works at a gas pump.

  1. The card payment machine is used to swipe the card at the pump for making payment.
  2. The issuing puts a hold on the payment temporarily on the basis of the amount available in the bank account.
  3. After the completion of the sale, the settlement of the transaction is done.
  4. The hold is released and the merchant receives the cost of the goods he has sold.

Authorization hold is not needed in the case of immediate process. The fund transfer to the merchant’s account is done after the submission of the batches of transactions by the merchant.

Reasons of using authorization holds

There are many reasons of using authorization holds and some of them are discussed here.

Money is saved and costs are reduced

The schemes provided for the cards do not charge any interchange fees unless the money is transferred from the customer’s account to the merchant account. Authorization holds also prevents refunds. On the cancellation of the order, the money is automatically released from the hold and merchants need not issue the refund. In this way, they are saved from paying any refund fee.

Customers are happy

Authorizations holds help the merchants to minimize the risk related to the delayed billing.

Wrapping Up

These are the ways in which authorization holds work. It is beneficial for the customers and the merchants.

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