What Is POS Pre-Authorization and How Does It Work?
Learn about POS pre-authorization. Understand how this common payment process works and its effect on your financial transactions.
A point-of-sale (POS) pre-authorization allows businesses to temporarily reserve funds on a customer’s payment card. This temporary hold ensures sufficient funds are available for an eventual transaction without immediately deducting money from the account. Understanding pre-authorization helps consumers navigate their financial statements and anticipate how their available balance may be affected.
Understanding POS Pre-Authorization
A POS pre-authorization, also known as an authorization hold, is a temporary reservation of funds on a customer’s credit or debit card. This process confirms card validity and adequate funds or available credit for an anticipated transaction. For merchants, pre-authorization provides security by verifying payment capability before services are rendered or products are delivered, acting as a safeguard when the final transaction amount is not precisely known.
For customers, a pre-authorization is not a final charge; rather, it is a temporary earmarking of funds. The money is not transferred to the merchant’s account but is set aside to ensure it cannot be spent elsewhere. This differs significantly from a completed transaction, where funds are fully debited and transferred to the merchant. The hold temporarily reduces the customer’s available credit or bank account balance, but the actual funds remain in their account until the transaction is finalized.
How Pre-Authorization Works
A POS pre-authorization begins when a customer presents their payment card at a merchant’s point-of-sale system. The merchant requests the customer’s card issuing bank to verify card validity and fund availability. This request travels through the merchant’s payment processor to the card network, and then to the issuing bank. The issuing bank checks the customer’s account and, if funds are available, places a temporary hold on the requested amount.
Once the hold is approved, the earmarked funds become unavailable for other spending. This temporary hold typically lasts one to eight business days for debit cards, and up to 30 days for credit cards, depending on the issuer and transaction type. When the actual transaction amount is finalized, the merchant “captures” the funds, converting the hold into a completed charge. The captured amount can be equal to or less than the pre-authorized amount, but it cannot exceed it without an incremental authorization.
If the transaction is not finalized, or if the final amount is less than the pre-authorized hold, the remaining or full held amount is “released” back to the customer’s available balance. If a merchant does not capture the funds within the specified timeframe, the pre-authorization hold may automatically expire, and the funds will be released. In such cases, the merchant would need to initiate a new transaction if payment is still required.
Common Scenarios and Customer Experience
POS pre-authorizations are common in situations where the final cost of a service or product is not known upfront. Hotels often place a pre-authorization hold at check-in to cover the room rate plus potential incidentals. Car rental agencies utilize these holds for rental costs, fuel charges, or potential damages. Gas stations commonly use pre-authorizations before fuel is dispensed to ensure payment.
On a customer’s bank statement, a pre-authorization typically appears as a “pending” transaction. This indicates funds are reserved but not yet fully processed. While pre-authorizations do not immediately deduct money, they do reduce the available balance, which can cause concern if a customer is unaware or has limited funds. For instance, multiple overlapping holds, such as for travel bookings, can significantly restrict financial flexibility.
Customers may also experience delayed release of funds if a hold is not promptly captured or cancelled by the merchant, leading to a temporary unavailability of their money. It is advisable for customers to monitor their bank or credit card statements for pending transactions and understand that these are temporary holds, not final charges. If a hold persists longer than expected, contacting the merchant or the card-issuing bank can help clarify the status and facilitate its release.