Not all businesses are the same. While some fulfill a transaction exchange at the moment of purchase, others may take days to provide the product or service purchased. In this case, a credit card authorization would ensure that the customer has the funds before you provide your end of the transaction.
To ensure that the customer isn’t charged until your end of the transaction is complete, you can place a hold on the authorization. Easy, right? It is, but if you charge an authorization too far after the initial hold, you could face a chargeback. This could result in no payment for your product or service and additional losses in chargeback fees.
Before we get into why a chargeback can occur, let’s recap how credit card authorization works.
A Refresher on Credit Card Authorization
No matter what the transaction method (EMV, swiped or keyed-in), every transaction goes through a six-step authorization process that ultimately approves or rejects the credit card. If approved, the transaction can be put on a credit card hold or have it settled along with other transactions that will be deposited into your bank account.
For a business that needs a few days to get an online order packed and shipped, an authorization hold is the perfect solution to keep customers at ease. But charging a credit card hold too many days after authorization can incite authorization-related chargebacks.
Authorization Hold Results in Chargebacks
Similar to bank-initiated chargebacks, authorization-related chargebacks are initiated when a transaction is not completed within the guidelines defined by the card issuer (Visa, MasterCard, Discover or Amex). Although these recommendations differ slightly from issuer to issuer, it’s recommended to avoid charging a credit card hold on day seven or later.
MasterCard’s chargeback guide has an entire section dedicated to authorization-related chargebacks and states that “the issuer may submit an authorization-related chargeback when the authorization chargeback protection time period had expired for the presentment (meaning seven days for final or undefined authorizations and 30 days for preauthorizations) and one of the following:
- For a transaction occurring at a merchant located in the Europe Region, the account was permanently closed before the chargeback was processed.
- For a transaction occurring at a merchant located in any other region, the issuer deemed the account not to be in good standing (a “statused” account) before filing the chargeback.
Amex provides a specific reason code in its Chargeback Code Guide for a lengthy authorization hold: Reason code 4521. The merchant submitted a transaction for payment, but the authorization for the transaction has exceeded seven days.
The Visa Chargeback Management Guide notes that “when you hold transactions beyond the period defined in your merchant agreement (usually one to five days), you lose money, affect customer service (cardholders expect to see transactions on their Visa statements within the same or next monthly cycle), and possibly invite a chargeback.”
It’s important to follow the card brand guides so that you don’t get hit with avoidable chargebacks. You can also partner with a Merchant Account Provider that has your best interests in mind. Some Virtual Terminals are programmed to automatically void held transactions on the seventh day. Though this process will force you to rerun the transaction, it protects your business from losses and chargebacks that you would automatically lose.