Hailey Johnson
When a debit card is used to make a purchase, the merchant obtains authorization from the bank by swiping the card through a credit card terminal. This results in a temporary hold on the transaction amount, during which the available balance in the cardholder's account is reduced, but the actual balance remains unchanged until the merchant collects the funds. This process, known as an authorization hold, is designed to ensure that the merchant receives payment for the goods or services provided while preventing the customer from spending the same money elsewhere. While authorization holds are beneficial for merchants in preventing chargebacks and managing disputes, they can also help cardholders avoid overdraft situations by providing a more accurate picture of their available funds.
| Characteristics | Values |
|---|---|
| Definition | Authorization hold means a transaction has not been completed but is still processing. |
| Available balance | The available balance will immediately decrease as a hold is enacted because the merchant has obtained authorization from the bank. |
| Actual balance | The actual balance remains the same as the merchant has not collected the funds. |
| Time lag | The time lag between authorization and settlement can cause the transaction amount to change. |
| Double hold | Negligence or computer error may cause a double hold on the cardholder's account. |
| Unauthorized transactions | The cardholder is generally not held responsible for transactions they did not authorize. |
| Chargeback prevention | Authorization holds are a valuable chargeback prevention technique for merchants. |
| Overdraft prevention | Authorization holds help cardholders avoid overdraft situations by providing an accurate picture of available funds. |
| Duration | The duration of an authorization hold varies for each type of credit card and issuing bank. |
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What You'll Learn
Authorization holds
An authorization hold is a temporary freeze on a portion of your credit line or bank account balance. It is a common practice in the banking and credit card industries. When you make a purchase, the merchant sends a request to your bank to place a hold. This request checks your account for enough available funds to cover the transaction. During the hold, your available balance decreases even though the actual funds remain untouched. The hold duration depends on both the merchant's policies and your bank's regulations. This temporary hold serves as a guarantee for merchants, protecting them from potential losses due to insufficient funds or fraudulent activities.
The usual reason for authorization holds is a two-step process in the payment, consisting of authorization and settlement with a time lag in between. These are common with signature-based (non-PIN-based) credit and debit card transactions where a transaction is authorized but not settled for a few days. It is also common in hotels, rental car services, or pay-at-pump filling stations, where the company wants to confirm a valid method of payment has been received before providing goods or services.
Another issue that occurs with authorization holds is the transaction amount changing between the time the hold is placed on the account and when the transaction is settled. This often happens when the final debit amount is uncertain when the authorization is obtained. For example, if an individual makes a fuel purchase by swiping a check card or credit card at the pump without using the PIN, the pump does not know how much fuel will be used.
Pre-authorization charges are particularly beneficial for businesses selling high-risk products, offering long shipment periods, or wanting to avoid chargebacks. They are extremely common in the hospitality industry, guaranteeing that funds are available in case of additional charges, such as cleaning, room service, or damages to the room. They can also help streamline the check-in process, removing the need for hotel owners or Airbnb hosts to manually process additional payments.
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Disputing transactions
If you notice an error in your bank statement, you should contact your bank immediately. The bank might be able to quickly resolve the issue. Generally, you will not be held responsible for processing errors or transactions you did not authorize. However, different laws and rules apply depending on how your check was processed.
You can dispute a transaction if it meets any of the following criteria:
- You paid for merchandise or a service and didn't receive it, or only received part of it.
- You signed up for a free trial and were unknowingly charged for a subscription.
- You canceled a service but are still being charged for it.
- You made a purchase, but the amount on your statement is wrong, or you were charged twice.
- The merchandise or service purchased was not as described.
- The transaction wasn't authorized by you, a joint holder, or an authorized user – this could indicate fraud.
Pending transactions cannot be disputed as the amount may change or the transaction may drop off your account. You can report a problem with a transaction once it has been posted, which generally takes about five days. It is recommended to work directly with the merchant first, as this is typically the fastest way to resolve the issue. If you are unable to resolve the issue with the merchant, gather all your documents before filing a dispute.
Most transactions must be disputed within 60 days of the date of the statement on which the error appeared. During the investigation, the bank is required to investigate its records for errors. If the matter is still unresolved after 10 days, the bank must temporarily credit your account for at least a portion of the disputed amount and continue investigating for 45 days. The investigation can take anywhere from 90 to 120 days to complete.
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Signature/credit transactions
The authorization hold is a powerful security measure that gives card issuers and businesses a routine way to screen for potential fraud before it turns into a successful transaction. During the transaction, the cardholder may be required to enter a PIN or provide their signature to prevent fraudulent charges, a process known as authentication, validation, or verification.
In the past, credit card companies relied on receipt signatures to prevent fraud. They required merchants to collect and store customer signatures so that if a transaction was disputed, the merchant could produce a signed receipt as proof of the customer's approval. However, with the advent of EMV technology, companies like Visa, Mastercard, Discover, and American Express have stopped collecting signatures on credit and debit card transactions.
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Electronic Fund Transfers (EFT)
An Electronic Funds Transfer (EFT) is a method of transferring money from one bank account to another, either within a single financial institution or across multiple institutions, via computer-based systems. EFT is an umbrella term that refers to a number of different transfer methods. The funds transfer process generally consists of a series of electronic messages sent between financial institutions, directing each to make the debit and credit accounting entries necessary to complete the transaction.
EFTs are commonly used by businesses to pay employees, by utility companies to collect payment for services, and by retailers to pay suppliers. They are also used for direct deposits, which automatically deposit funds into an employee's account, bypassing most of the paperwork of manual deposits. Direct deposits only require a bank account and the completion of an initial setup process, which may require some additional information. EFTs can also be completed over the phone.
EFTs are also used for ATM transactions, which rely on the digital transmission of information between a user’s bank and the ATM machine. When a person withdraws cash from the ATM, funds are electronically transferred from the person’s bank account and physically dispensed through the machine instantly.
The United States Electronic Fund Transfer Act of 1978 defines an EFT as "a funds transfer initiated through an electronic terminal, telephone, computer (including online banking) or magnetic tape for the purpose of ordering, instructing, or authorizing a financial institution to debit or credit a consumer's account". Rules that govern EFT payments will also apply if you make an ATM withdrawal, or if you use a debit card, debit card number, or your checking account number without writing a paper check.
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Double holds
A double hold on a cardholder's bank account occurs when a merchant attempts to authorize a card twice. This often happens when a processor requires additional security verification, such as a card security code, ZIP code, or address, and incorrect information is provided or mistyped. Gasoline pumps often impose a double hold, one for a standard amount (e.g., $75) and another for the amount of the purchase. Although the merchant will only settle the transaction once, the hold will temporarily lower the customer's available balance, potentially causing declines or overdrafts for debit cards.
Additionally, some merchants, such as gas stations, hotels, and restaurants, may pre-authorize an amount that is higher or lower than the actual purchase amount. For example, gas stations may pre-authorize transactions ranging from $1 to $100 because they don't know how much gas will be pumped in advance. This can result in a double hold, especially if the customer uses a debit card that doesn't require a PIN.
To avoid issues with double holds, customers can use their debit card and enter their PIN whenever possible. Using a credit card can also help avoid double holds, as they typically have higher credit limits and are less likely to result in overdrafts.
It's important to note that authorization holds are temporary and will expire or be released once the transaction is completed or aborted. However, it can take up to 10 days for the hold to be removed from the customer's account, depending on the bank's policy.
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Frequently asked questions
A debit authorization hold is a temporary lock on debit funds by a merchant in a transaction. It is placed after a transaction is authorized and lasts until the issuing bank transfers the funds to the merchant’s account.
Banks use debit authorization holds to ensure that the merchant gets paid for the goods or services sold by preventing the customer from spending the promised money elsewhere.
The duration varies for each type of credit card hold. Card brands set regulations that try to balance the amount of time it might take to finalize transactions with the amount of time that cardholders are willing to have their money tied up.
If the transaction is not settled before the hold expires, you will probably need to cancel it.
You should contact your bank right away. The bank might be able to clear up the problem quickly. Generally speaking, you will not be held responsible for transactions you did not authorize.
