In the payment processing industry there is a lot of payment jargon used interchangeably, and sometimes done so incorrectly. As a business owner processing credit cards, it is important you know what these terms mean so you use them correctly if a customer asks.
If you’ve landed on this blog, it’s because you’re trying to determine the difference between two industry terms: credit card authorization versus credit card pre-authorization. Let’s dive in.
Understanding the Credit Card Authorization Process
Typically every “successful” transaction gets an authorization, meaning it wasn’t declined. This is the card-issuing bank’s confirmation that there are funds available to complete the transaction, which will be accompanied by an authorization code.
Usually a declined transaction will not get an authorization code, but instead will get, yes you guessed it, a decline code. However, there are some exceptions to this. If a transaction declines due to AVS, CVV or no match on ZIP code, the card-issuing bank will still authorize the transaction. Receiving a decline in these scenarios depends on how your transaction settings are configured.
Credit Card Pre-Authorization Meaning and Impact
Now that you have an understanding of credit card authorization, pre-authorization should be a bit easier to grasp. Pre-authorization is a way to test if a card “works.” This encompasses a few things: available funds, address match and whether the card is active.
The process of credit card pre-authorization is as follows:
- A transaction is initiated and a credit card is inserted, swiped or keyed in.
- A test transaction of $0 or $1 is charged.
- The card is tested for funds and address match.
- Depending on the pre-authorization success, the true transaction amount will either run or not.
If the pre-authorization test is successful the true transaction amount will be charged, and if it fails, the transaction will not run. The test transaction of $0 or $1 will not actually be charged to the customer’s card, but it will show up in their activity. This line item will eventually drop off and won’t show up on the final statement.
Credit card pre-authorization isn’t standard with every merchant account and not every Merchant Service Provider offers it. If it’s available, you should have the option to enable and disable this feature at your leisure. This service usually has a small, associated cost, but its benefits outweigh the minimal fees you’d pay to use it.
The Benefits of Pre-Authorization
Pre-authorization ultimately allows for you to have more successful credit card authorizations at your business and maintain a steady flow of funds. The number of AVS declines you might run into is decreased with pre-authorization, allowing your business to correct transactions before potentially tying up a large amount of the available funds or credit on your customer’s card. Customers also benefit from getting a real-time glimpse of their available funds.
If you ran a $3,000 transaction that came back with an AVS decline, that lowers your customer’s available funds by $3,000 until the pending charge is cleared. Attempting a second time with the correct address information may result in another decline due to insufficient funds or credit limits, confusion for the customer when they view their statement or accidental disputes against your business.
Whether pre-authorization is the best way to avoid declines depends on your provider and the types of transactions you’re taking. Speak with your Merchant Service Provider to ensure your account is set up to optimize credit card authorizations and maintain security for you and your customers.
Best Practices for Businesses Using Pre-Authorization
While pre-authorizations can benefit businesses and customers alike, implementing them effectively requires careful consideration. Here are some best practices:
1. Choose the Right Merchant Service Provider
Not all payment processors offer pre-authorization capabilities, and some may charge additional fees for using this feature. Ensure your provider supports pre-authorization and aligns with your business needs.
2. Clearly Communicate Pre-Authorization Holds to Customers
Customers may be confused when they see a pending charge or hold on their account. To prevent disputes, proactively inform customers about the temporary hold, how long it will last, and when the funds will be released.
3. Set Appropriate Pre-Authorization Windows
Pre-authorizations expire after a certain period (typically 5 to 7 days, depending on the card issuer). If a transaction isn’t completed within this timeframe, the funds may be released, requiring a new authorization. Businesses should manage these timeframes carefully to avoid failed transactions.
4. Avoid Excessive Holds on Customer Funds
Placing unnecessarily high holds can frustrate customers and impact their available credit. Set reasonable pre-authorization amounts that align with potential final charges to maintain trust and avoid customer dissatisfaction.
5. Monitor Pre-Authorized Transactions Regularly
Keeping track of pre-authorized transactions ensures that they are either completed or released appropriately. Failing to complete authorizations can lead to unnecessary fund holds or lost revenue.
6. Be Aware of Potential Processing Fees
Some merchant accounts charge fees for pre-authorization transactions, particularly if they are not converted into final charges. Understanding your pricing structure can help you assess whether the benefits outweigh the costs.
7. Optimize Pre-Authorization for Fraud Prevention
Pre-authorizations can be an effective fraud prevention tool when combined with Address Verification Service (AVS) and CVV matching. Ensure that your pre-authorization settings are configured to flag suspicious transactions while minimizing false declines.
By following these best practices, businesses can maximize the benefits of pre-authorization while maintaining smooth transactions and positive customer experiences.
Ready to Learn More Credit Card Processing Best Practices?
If you found this blog helpful and want to deepen your understanding of beneficial payment processing tools and best practices, dive deeper with our credit card processing guide. This free comprehensive guide was written by our payment experts to explain payment basics and help professionals make informed decisions about payment processing software.
Credit Card Processing: The Definitive Guide
Editors Note: This post was originally published in November 2019 and has been updated for comprehensiveness and accuracy.
