Preauthorization is a new facility that Interswitch offers to online merchants to temporarily block / freeze some amount of funds when a customer places an order.
Card pre authorization is an important and useful practice for merchants accepting payments in person or online, and offers many benefits. With pre-authorization of payments, merchants ensure their customers pay for the products and services they use. Merchants also save time and money by eliminating the instance of fees for refunds, MDRs, and the hassle of processing chargebacks. But, how do they work?
A pre-authorization is essentially a temporary hold placed by a merchant on a customer’s credit card, and reserves funds for a future payment transaction. This hold typically lasts about 48 hours.
During the hold period, the funds are unavailable to the customer – they won’t be able to withdraw it from an ATM, or to spend it elsewhere. Although the funds cannot be accessed in their account, no money has been debited in the pre-auth, it is simply reserved. When the time comes to finalize a payment – for example, checking out of a hotel – the funds on hold can then be “captured”, meaning they are converted to a charge.
There are many benefits to pre authorization. Merchants can reduce their fees, while also providing customers with a positive experience. Here are some of the main benefits to both merchant and customer.
1. Ensures customers pay for their services.
By putting a hold on customer funds, businesses do not have to fear that a customer will leave without paying for the services they used.
Instead of worrying that a customer will leave without paying for the services they’ve used, place a hold on the funds and ensure that all incidentals and additional charges will be covered.
2. Avoids chargebacks.
Pre authorized payments are amongst the easiest ways to prevent chargebacks. If funds have not yet been captured, the cardholder cannot issue a chargeback, as it is not a confirmed charge open to dispute.
3. Avoids MDR fees.
Many issuers of credit cards charge an MDR (merchant discount rate) fee only when a transaction is fully authorized.
4. Avoids refund fees.