Top 5 Credit Card Pre-Authorization Benefits for Businesses

The global pandemic impacted merchants both positively and negatively - from increased online shopping - which jumped by 4% in just 1 year - to increased online payment fraud, which registered 35% more online fraud attempts than pre-pandemic times.

With these statistics in mind, there is one feature that is often underestimated by businesses. In this article, we will discuss some of the biggest credit card pre-authorization benefits for businesses online, and how merchants can use this feature to their advantage.

Credit card pre-authorizations can be highly beneficial for organizations of all sizes, especially in industries that are selling high-risk products, items that take time shipping, or simply are facing a lot of fraud and chargebacks.

However, because it’s a relatively new concept in the field of digital payments, not all merchants are yet familiar with the main credit card pre-authorization benefits for their business operations and customer experience.

But before we move on to the advantages and common uses of pre-authorized payments, let’s get familiarized with the concept first:

What does a credit card pre-authorization mean?

A credit card pre-authorization is a charge on your credit or debit card similar to other bank charges, with the difference that instead of taking money from your card immediately, the funds are put “on hold” for several days. This extra step is done to guarantee the availability of the payment funds before the transaction is finally confirmed.

The duration of this hold usually depends on a four-digit number called the Merchant Classification Code or MCC, which is used to classify the businesses by the type of goods or services they provide.

It means that some merchants will be qualified for a longer hold than others, but the general rule is to charge the card within 7 days, otherwise the hold expires and you have to call the customer and go over the whole payment process again.

Once a certain amount of money has been put “on hold” from the customer's bank account, it means that it is blocked, and cannot be spent on something else.

However, if the merchant does not obtain the funds within a reasonable period of time, the money will be released back to the credit card holder.

And that we have clarified to concept of pre-auth, let’s move on to the credit card pre-authorization benefits for businesses:

What are the biggest credit card pre-authorization benefits for merchants?

There are multiple credit card-preauthorization benefits for businesses that want to take advantage of this feature, such as:

1. Chargeback prevention

Pre-authorized payments are a great way to prevent or reduce the amount of chargebacks that a lot of merchants are experiencing. If the merchant hasn’t captured the funds yet, the cardholder cannot issue a chargeback claiming that the transaction was fraudulent.

During the period in which the funds are on hold, companies have more time to perform additional fraud checks and ensure that the transaction is indeed real, and the credit card has not been stolen. There are multiple reasons why it’s extremely important that companies try to reduce chargebacks to the greatest extent possible, which go much beyond the negative impact on their own revenue:

• Non-compliance with PCI-DSS - a high amount of chargebacks, especially when it’s caused by fraudulent activities, may lead to non-compliance with the Payment Card Industry Data Security Standard. Consequently, merchants can get fined because of it.

• Denied payment processing - if a merchant is registering an excessively high number of chargebacks, the credit card associations can potentially deny his ability to process payments online temporarily or permanently.

• Penalties from acquiring banks - because acquiring banks are responsible for every merchant with whom they do business, card networks may also impose penalties on them if the merchant has a high chargeback activity. To cover the losses, acquiring banks may translate these penalties to the merchant.

• Chargeback costs - and of course, a high volume of chargebacks also impacts the business’ revenue directly. From lost merchandise to chargeback fees and increased operational costs, there are multiple reasons why merchants should aim to keep chargebacks in the low numbers.

To put things into perspective, an acceptable chargeback rate is between 0.9% and 1% depending on the credit card issuer.

With all of this said, it is no surprise why one of the biggest credit card pre-authorization benefits is chargeback prevention. Because it gives more time for merchants to monitor suspicious activity, they are able to reduce fraudulent chargeback occurrences and move forward with processing the transaction safely.

You can also reduce chargebacks by accepting payments with an advanced Payment Gateway that will work closely with you to understand your challenges and resolve them efficiently.

2. Better inventory management

One of the main credit card pre-authorization benefits is that it allows merchants to have better management over their inventory.

By using pre-authorized payments, the merchant has time to make sure that he has enough inventory to satisfy all orders, and there will be no discount rate charges for orders that cannot be delivered.

With an authorization hold, merchants can easily let their clients know if the product that they have ordered is out of stock, without having to issue a refund. They simply won’t obtain the funds in case the product can’t be delivered, and they will be released back to the credit card holder.

According to Convey.co, statistics have shown that 34% of businesses have shipped an order with delay because they sold a product that was out of stock. While many buyers won’t mind receiving their order with delay, there is a risk that some of them may file a chargeback in case they don’t want to wait for the order or the refund.

3. Your payment is guaranteed

Next on our list of credit card pre-authorization benefits is that this helps to ensure that, as a merchant, you get paid for the service that you offer (or the product that you are selling).

When the funds are put on hold, they are “frozen” and can’t be used, which means that they are no longer available for the customer to spend on something else while you are settling the transaction.

By putting an authorization hold on services like a car rental or a hotel stay, you make sure that there will be enough funds to cover any additional charges or damages. In this case, pre-authorization serves as a security deposit for any incurring charges.

4. Costs reduction

Speaking of credit card pre-authorization benefits, another one on the list is reduction in costs. For example, when you start a pre-authorization and finish it up later, you won’t have to pay interchange fees as a merchant until the actual transaction is processed.

This means that, if the transaction has been cancelled for any reason, you won’t lose out on interchange fees. You might only have to pay the payment gateway fee.

It’s important to keep in mind that some merchant services providers might charge you fees on pre-authorizations. In this case, you consider looking into a different one.

5. Customer experience

As a customer, ordering goods and not receiving them due to lack of inventory can be very frustrating. So, having a policy that lets them know about an authorization hold until inventory is confirmed can be really helpful for their satisfaction.

Additionally, if there is any issue with the payment order, having the funds available within a couple of days can significantly help to mitigate the customer’s frustrations, which adds up to a much better overall experience.

6. Avoid refunds

Another one on our list of credit card pre-authorization benefits are refunds. Let’s say that a customer has rented a car for a few days, and the company needs a security deposit to ensure that the car will be returned without damage.

Instead of charging the amount for the deposit and then later refunding the customer (which is also associated with extra costs), this amount can simply be reserved through a pre-auth and then later made available again.

How long can a credit card authorization be held?

Now that we’ve cleared out the biggest credit card pre-authorization benefits, let’s take a look at the duration of the pre-auth holds.

A credit card authorization can be held anywhere between 1 day and 31 days, depending on the type of merchant as described in the Merchant Category Code. On average, the temporary hold lasts around 5 business days.

What are the most common uses for pre-authorizations?

Some common uses for credit card pre-authorizations include, but are not limited to, the following situations:

1. Trading and ecommerce

Authorization holds are a common practice in trading and e-Commerce, especially when the merchant is managing inventory or if product shipping takes time.

To avoid customer dissatisfaction from product delivery issues, such as delays, wrong items or damaged goods, the credit card will be charged only when the products have been successfully delivered.

2. Car rental companies

This payment process is a common practice in car rental companies, where an authorization hold is secured on the credit or debit card to cover not only the estimated rental charges, but any possible additional charges as well.

It ensures that the customer will have available funds to cover any damage in case the car is not returned in a good shape. Once the rental duration is over and the vehicle is returned to the company, the funds that were put on hold are released.

3. Hospitality industry

Pre-authorizations are extremely frequent in hotel scenarios to guarantee available funds in case any additional charges incurred during the hotel stay, such as room service or other amenities.

Pre-authorized payments can happen at any time of the booking stage or during the check-in process.

As with car rental companies, this amount is different depending on the hotel and the country. In case that there were no additional charges during the hotel stay, the funds are released back to the cardholder.

4. Gas stations

A lot of gas stations put an authorization hold on your credit card because they cannot estimate in advance the amount of gas that you are planning to pump in your vehicle.

If the company put on hold $60 but the actual transaction was for $30, the additional funds will be released. This method is starting to gain popularity in the new self-service gas stations which don't need human personnel to give service to their clients.

5. Restaurants

Additionally, some restaurants leverage the credit card pre-authorization benefits to ensure that the customer will have enough funds in this credit card.

This amount is usually the total amount of the purchase plus 20%, otherwise the card can be declined. This method is popular in high-end restaurants, especially in cases where they risk losing a lot of money from clients that make a reservation and do not appear.

Accepting pre-authorized payments with MYMOID

MYMOID is proud to offer its new generation of secure pre-authorized payments, especially designed to improve efficiency and overall customer satisfaction so that you can make use of all credit card pre-authorization benefits as a merchant.

As a company that values innovation, quality and usability, providing an outstanding experience for our customers is the main driving force for everything we do.

That's why our authorization hold solution is carefully designed and developed for businesses that want to get the optimum experience for themselves and their final clients.

How does our pre-authorized payments service work?

If you are charging the credit card immediately after the completion of a payment order, you face higher risks for chargebacks and insufficient funds. However, our pre-authorized payments provide the following control of your payment process:

Step 1: At the checkout, MYMOID provides the customer with a payment link or a payment order. Once it has been completed by the user with his card details, our payment gateway connects with the payment network, communicating to the card issuer that a certain amount of money will be put on hold.

This process gives the merchant a much better control over his operations, as he has up to 7 days to check the credit card for fraud, sufficient funds, or just to check his own inventory to make sure that he will be able to make the delivery.

In particular cases, the merchant can charge up to 15% more of the sum that has been put on hold. This is a very common practice for car rental companies, in situations where a car has been returned with damages, to make sure that the customer will have enough money to cover them.

Step 2: After the money has been put on hold, the merchant usually has between 72 hours and 7 days to decide whether to capture the funds or release them back to the customer. This gives him the time to perform validity checks and make sure that everything is in order.

Step 3: In case that everything has been successfully validated, the acquiring bank gives a positive response for the transaction, and the merchant receives his money. Otherwise, the sum is released to the customer.

With MYMOID´s payment gateway, you can perform pre-authorizations and receive a much bigger control over your operations. We believe in true payment experience, that's why we are working every day to improve and optimize our solutions.