Using Authorization Holds to Prevent Disputes

Sydney VaccaroFraud PreventionLeave a Comment

Using Authorization Holds to Prevent Disputes
See how using authorization holds can help your business prevent fraud and disputes.

Using authorization holds is a common practice used by gas stations, car rental services, and hotels. There is a good reason for this. Merchants who use this practice effectively can prevent disputes, fraud, and refunds.

What is an Authorization?

Authorizations are part of the payment process that the customer never sees. When a customer enters in their card number online or uses it at a physical terminal, there is a series of parties and actions that take place to approve that transaction. Authorization is the first step in this process. This step is the communication from the issuer through the credit card processor that the customer has sufficient funds in their account to cover the transaction cost.

What is an Authorization Hold?

An authorization hold takes place before the settlement of funds. When a merchant gets the confirmation that the cardholder has enough funds in their account, the funds are held. This means that the cardholder cannot access the funds, in turn, guaranteeing the merchant will get paid. If a cardholder uses a debit card it will deduct the available funds from the account. If they use a credit card the amount of credit available decreases.

Even though the amount of funds that is available to the customer has gone down, it does not mean the money was transferred to the merchant account. Merchants can take advantage of the gap between when funds are being held in the card holder’s account but not yet transferred to the merchant account. This is where fraud, dispute, and refund protection can take place.

What is an Authorization Key?

A credit card authorization key is a code used in credit card transactions that confirms the cardholder has enough funds to make a purchase. A credit card authorization key consists of a numeric series that confirms a payment may be processed. The process of encrypting the credit card and transaction information into an authorization key keeps the card information safe while communicating with all the necessary parties.

Hospitality and Car Rental Holds

Some services, like hospitality or car rental services, authorize the card at the beginning of service, but the settlement will not be placed until the completion of the service. For example, when you check into a hotel, they may ask for a credit card to use as a deposit. In this case, the hold is placed in case of additional charges or services. This additional deposit covers any additional unexpected charges for damages, excessive mileage or fuel, or if hotel guests charges room service or movies to the room.

Upon the completion of the service, such as check out or the return of the rental car, the merchant will then process the settlement of any final charges and submit them to the processor. It is not until then that the merchant will receive any funds. Even though the customer’s account would have shown the pending transaction from the authorization at the beginning of service.

Benefits of Using Authorization Holds

Hotels, gas stations, and car rental services use authorization holds regularly. Should other merchants? Here are some of the benefits of using authorization holds.

Preventing Disputes

When a merchant makes an authorization hold, there has not been a completed transaction yet. Which means there is not yet a transaction to dispute. This time between actually completing the transaction gives merchants the chance to validate the card through the necessary security checks. By making sure the transaction placed by the true cardholder prevents true fraud disputes.

It also gives cardholders time to catch fraud themselves. If a cardholder notices the hold on their account and does not recognize the charge, it gives them time to contact the merchant and cancel the order before the transaction goes through.

No Refunds

Fulfillment doesn’t always go perfectly. Occasionally merchants go to send out an order and realize they are out of stock in that item. If the merchant waits to complete the transaction until the item is shipped it prevents the need to issue a refund. The merchant will just need to release the hold, leaving the money in the cardholder’s account.

Authorization Hold Time Limits

The length of the hold depends on the four-digit Merchant Classification Code or MCC. Some merchants, based on the nature of their business have the ability to hold the amount longer than others.

TRANSACTION TYPE / MERCHANT / MCC
HOW LONG THE APPROVAL IS VALID FOR A TRANSACTION DATE
Aggregated Transaction in a Card-Not-Present Environment Seven calendar days from the date on which the first Authorization Request received an Approval
In-Transit Transaction Within 24 hours* of the Approval Response

*Authorization may occur after the transaction is completed, while in transit, or when the cardholder reached his or her final destination.

Installment Transaction

Prepayment

Recurring Transaction

Unscheduled Credential-on-File Transaction

Card-Not-Present transactions classified with MCC 4121 (Taxis and Limousines)

The day when either of these transactions occurs is when an Approval Response is valid.
Transactions* initiated at a turnstile, fare gate or point of boarding at a transit merchant classified with MCC 4111, 4112 or 4131

*Initial Authorization Request is required.

No later than 7 calendar days* from the date of the Approval Response to the Initial Authorization Request**.

*The time limit the US Region is 3 calendar days.

**Any Incremental Authorization Requests do not extend this timeframe.

Transactions* initiated by merchants who offer one of the following services:

Aircraft rental

Bicycle rental

Boat rental

Equipment rental

Motorhome rental

Motorcycle rental

Trailer parks and campgrounds

*An Estimated Authorization Request is required.

No later than 7 calendar days from the date of the Approval Response to the Estimated Authorization Request*.

*Any Incremental Authorization Requests do not extend this timeframe.

Transactions initiated by merchants who offer one of the following services:

Cruise Line

Lodging

Vehicle Rental

*An Estimated Authorization Request is required.

No later than 31 calendar days from the date of the Approval Response to the Estimated Authorization Request*.

*Any Incremental Authorization Requests do not extend this timeframe.

Mass Transit Transaction No later than 3 calendar days from the date of the Approval Response
Other Card-Not-Present Transactions No later than 7 calendar days from the date of the Approval Response
Other Card-Present Transactions The day when either of these transactions occurs is when an Approval Response is valid.
Source: Visa Core Rules and Visa Product and Service Rules

Authorization Chargeback

While authorization holds can be useful, it is important to be on top of this process. Waiting too long to complete a transaction can also cause disputes. Types of authorization-related disputes include:

American Express Discover MasterCard Visa
A01 Charge Amount Exceeds Authorization Amount AT Authorization Noncompliance 4807 Warning Bulletin File 11.1 Card Recovery Bulletin or Exception File
A02 No Valid Authorization 4808 Authorization-Related Chargeback 11.2 Declined Authorization
A08 Authorization Approval Expired 4812 Account Number Not On File 11.3 No Authorization

Not all of the above disputes are caused by authorization holds, but they all can result from mishandling the authorization process. While adding in authorizing holds can be a useful tool to allow more time for fraud screening and canceled transactions, it is important for merchants to stay on top of the authorization process to avoid disputes.

Using authorization holds is a common practice used by gas stations, car rental services, and hotels. There is a good reason for this. Merchants who use this practice effectively can prevent disputes, fraud, and refunds.

What is an Authorization?

Authorizations are part of the payment process that the customer never sees. When a customer enters in their card number online or uses it at a physical terminal, there is a series of parties and actions that take place to approve that transaction. Authorization is the first step in this process. This step is the communication from the issuer through the credit card processor that the customer has sufficient funds in their account to cover the transaction cost.

What is an Authorization Hold?

An authorization hold takes place before the settlement of funds. When a merchant gets the confirmation that the cardholder has enough funds in their account, the funds are held. This means that the cardholder cannot access the funds, in turn, guaranteeing the merchant will get paid. If a cardholder uses a debit card it will deduct the available funds from the account. If they use a credit card the amount of credit available decreases.

Even though the amount of funds that is available to the customer has gone down, it does not mean the money was transferred to the merchant account. Merchants can take advantage of the gap between when funds are being held in the card holder’s account but not yet transferred to the merchant account. This is where fraud, dispute, and refund protection can take place.

What is an Authorization Key?

A credit card authorization key is a code used in credit card transactions that confirms the cardholder has enough funds to make a purchase. A credit card authorization key consists of a numeric series that confirms a payment may be processed. The process of encrypting the credit card and transaction information into an authorization key keeps the card information safe while communicating with all the necessary parties.

Hospitality and Car Rental Holds

Some services, like hospitality or car rental services, authorize the card at the beginning of service, but the settlement will not be placed until the completion of the service. For example, when you check into a hotel, they may ask for a credit card to use as a deposit. In this case, the hold is placed in case of additional charges or services. This additional deposit covers any additional unexpected charges for damages, excessive mileage or fuel, or if hotel guests charges room service or movies to the room.

Upon the completion of the service, such as check out or the return of the rental car, the merchant will then process the settlement of any final charges and submit them to the processor. It is not until then that the merchant will receive any funds. Even though the customer’s account would have shown the pending transaction from the authorization at the beginning of service.

Benefits of Using Authorization Holds

Hotels, gas stations, and car rental services use authorization holds regularly. Should other merchants? Here are some of the benefits of using authorization holds.

Preventing Disputes

When a merchant makes an authorization hold, there has not been a completed transaction yet. Which means there is not yet a transaction to dispute. This time between actually completing the transaction gives merchants the chance to validate the card through the necessary security checks. By making sure the transaction placed by the true cardholder prevents true fraud disputes.

It also gives cardholders time to catch fraud themselves. If a cardholder notices the hold on their account and does not recognize the charge, it gives them time to contact the merchant and cancel the order before the transaction goes through.

No Refunds

Fulfillment doesn’t always go perfectly. Occasionally merchants go to send out an order and realize they are out of stock in that item. If the merchant waits to complete the transaction until the item is shipped it prevents the need to issue a refund. The merchant will just need to release the hold, leaving the money in the cardholder’s account.

Authorization Hold Time Limits

The length of the hold depends on the four-digit Merchant Classification Code or MCC. Some merchants, based on the nature of their business have the ability to hold the amount longer than others.

TRANSACTION TYPE / MERCHANT / MCC
HOW LONG THE APPROVAL IS VALID FOR A TRANSACTION DATE
Aggregated Transaction in a Card-Not-Present Environment Seven calendar days from the date on which the first Authorization Request received an Approval
In-Transit Transaction Within 24 hours* of the Approval Response

*Authorization may occur after the transaction is completed, while in transit, or when the cardholder reached his or her final destination.

Installment Transaction

Prepayment

Recurring Transaction

Unscheduled Credential-on-File Transaction

Card-Not-Present transactions classified with MCC 4121 (Taxis and Limousines)

The day when either of these transactions occurs is when an Approval Response is valid.
Transactions* initiated at a turnstile, fare gate or point of boarding at a transit merchant classified with MCC 4111, 4112 or 4131

*Initial Authorization Request is required.

No later than 7 calendar days* from the date of the Approval Response to the Initial Authorization Request**.

*The time limit the US Region is 3 calendar days.

**Any Incremental Authorization Requests do not extend this timeframe.

Transactions* initiated by merchants who offer one of the following services:

Aircraft rental

Bicycle rental

Boat rental

Equipment rental

Motorhome rental

Motorcycle rental

Trailer parks and campgrounds

*An Estimated Authorization Request is required.

No later than 7 calendar days from the date of the Approval Response to the Estimated Authorization Request*.

*Any Incremental Authorization Requests do not extend this timeframe.

Transactions initiated by merchants who offer one of the following services:

Cruise Line

Lodging

Vehicle Rental

*An Estimated Authorization Request is required.

No later than 31 calendar days from the date of the Approval Response to the Estimated Authorization Request*.

*Any Incremental Authorization Requests do not extend this timeframe.

Mass Transit Transaction No later than 3 calendar days from the date of the Approval Response
Other Card-Not-Present Transactions No later than 7 calendar days from the date of the Approval Response
Other Card-Present Transactions The day when either of these transactions occurs is when an Approval Response is valid.
Source: Visa Core Rules and Visa Product and Service Rules

Authorization Chargeback

While authorization holds can be useful, it is important to be on top of this process. Waiting too long to complete a transaction can also cause disputes. Types of authorization-related disputes include:

American Express Discover MasterCard Visa
A01 Charge Amount Exceeds Authorization Amount AT Authorization Noncompliance 4807 Warning Bulletin File 11.1 Card Recovery Bulletin or Exception File
A02 No Valid Authorization 4808 Authorization-Related Chargeback 11.2 Declined Authorization
A08 Authorization Approval Expired 4812 Account Number Not On File 11.3 No Authorization

Not all of the above disputes are caused by authorization holds, but they all can result from mishandling the authorization process. While adding in authorizing holds can be a useful tool to allow more time for fraud screening and canceled transactions, it is important for merchants to stay on top of the authorization process to avoid disputes.