What Is a POS Pre-Authorization and How Does It Work?

A Point of Sale (POS) pre-authorization is a common practice in payment processing. It acts as a temporary reservation of funds on a customer’s payment card, verifying the card’s validity and sufficient balance for an anticipated charge without immediately deducting funds. This temporary hold secures future payments, especially when the final transaction amount is unknown.

Understanding POS Pre-Authorizations

A Point of Sale (POS) is the physical or virtual location where a transaction occurs, such as a retail checkout or online. Pre-authorization is a process where a merchant temporarily holds a specific amount on a customer’s card. This hold confirms the card’s validity and fund availability for a future transaction. It is a temporary reservation, not a final charge, meaning funds are set aside but not yet transferred.

The purpose of a POS pre-authorization is to verify a customer has adequate funds or credit for an anticipated payment. This ensures the merchant can collect payment without risk of insufficient funds. While held, the amount reduces the customer’s available balance or credit limit, effectively earmarking those funds for the specific transaction. This temporary reserve helps prevent overspending and provides a financial safety net for the business.

The Pre-Authorization Process

The pre-authorization process begins when a customer presents their payment card at a merchant’s terminal. The merchant initiates a request for an estimated amount, which is then sent through a payment processor to the customer’s card-issuing bank.

The card-issuing bank reviews the request to confirm the card’s validity and sufficient funds. If approved, the bank places a temporary hold on these funds. This held amount reduces the customer’s available balance or credit limit but is not debited. A unique pre-authorization code is provided to the merchant, confirming the successful hold.

Once the final transaction amount is determined, the merchant sends a “capture” request to the payment processor, indicating the actual amount to be charged. This triggers the final settlement, transferring the held funds from the customer’s account to the merchant’s. If the final amount is less than the pre-authorized amount, remaining held funds are released. If the transaction is canceled or not finalized within a specified timeframe, the pre-authorization expires, and funds are released back to the customer’s available balance.

Why Businesses Use Pre-Authorizations

Businesses use pre-authorizations to mitigate financial risk and ensure payment for variable or uncertain transaction amounts. This strategy helps businesses confirm fund availability before providing a service or product, reducing the likelihood of declined payments. It protects businesses when the exact cost is unknown upfront.

A benefit for businesses is protection against losses from insufficient funds or fraudulent activities. Verifying funds in advance helps merchants avoid chargebacks and associated fees. This is valuable for businesses delivering services before final payment, like hotels or car rental agencies. Pre-authorizations also help manage payment processing fees, as no transaction fees are incurred until the final charge is settled.

Businesses commonly employing pre-authorizations include gas stations, hotels, and car rental companies. Gas stations use them to ensure payment for fuel. Hotels secure payment for room charges and potential incidentals. Car rental agencies use pre-authorizations to cover rental fees, insurance, and potential damages. This practice provides businesses with confidence that funds are reserved for the eventual transaction, even if the final amount varies.

Common Scenarios and Consumer Impact

Consumers frequently encounter POS pre-authorizations. Gas stations, for example, pre-authorize a fixed amount (e.g., $75-$150) when paying at the pump to ensure sufficient funds. Hotels place a hold upon check-in to cover the room rate and estimated incidentals like minibar use.

Car rental companies routinely use pre-authorizations for rental cost, fuel, and potential damages. Restaurants opening a tab may pre-authorize a small amount to verify card validity before the final bill. Online orders with variable pricing might also involve pre-authorization to confirm payment capability before fulfillment.

The primary impact on consumers is a temporary reduction in their available credit or debit balance. The held amount is inaccessible for other purchases. For debit card users, funds are frozen in their checking account, potentially leading to declined transactions if they are not mindful of the reduced balance. This temporary reduction affects financial flexibility, especially for those with lower balances or credit limits.

Managing Pre-Authorization Holds

After a pre-authorization hold is placed, two outcomes are possible: settlement or reversal. Settlement occurs when the merchant finalizes the transaction, charging the actual amount to the card and replacing the temporary hold. This happens when the service is rendered or product picked up, and the final cost is known. Conversely, a reversal happens when the pre-authorization is canceled without a final charge, or the hold expires.

The duration of pre-authorization holds varies by merchant industry, card issuer, and transaction type. Most holds are released within 5 to 7 business days if no further merchant action is taken. However, for industries like hotels or car rentals, holds can extend for 14 to 30 days for additional charges or extended service. If a merchant does not capture the transaction within the hold period, funds are automatically released.

Consumers should regularly monitor bank statements or credit card accounts to track pre-authorization holds and their release. Online banking and mobile apps provide real-time updates on available balances. If a hold persists longer than expected, consumers should first contact the merchant. If the merchant cannot resolve the issue, contacting the card-issuing bank is the next step to assist in releasing the funds.