Payment Gateways are programmed to help with expired pre-authorizations so merchants don’t have to keep track of reversing them. This way, your customers’ funds are returned automatically, saving everyone from potential headache.
What is a Pre-Authorization on a Credit Card?
A pre-authorization (sometimes shortened to pre-auth) is similar to a purchase, but it does not complete a sale. Just like a purchase, the transaction is processed in real-time, and an approval code is provided to the merchant for the desired amount. However, the funds are not debited from the cardholder, but instead “frozen” or “reserved”. When the merchant is ready to “capture” the pre-approved funds, the merchant will submit a capture request to complete the sale.
Real World Example – Gas Station
Filling up your car at a gas station is a good real-world example of a pre-authorization in action. When you tap your card at the gas pump, the gas station will do a pre-auth on your credit card for $100, and then let you start filling up your vehicle. Once you’ve filled up, the gas pump will then capture the transaction for the final amount (e.g. $74) and automatically release the difference back on your card.
What Does It Mean for Funds to be Frozen or Reserved?
In a credit card example, every cardholder has a credit limit (e.g. $1000). When a pre-authorization is made for say, $100, although that amount has not been debited from the cardholder, it remains “on hold” therefore reducing the customer’s credit limit to $900 until the transaction has been finalized, or “posted”.
In the past, pre-authorizations used to expire after 30 days, but over time, Visa and other card brands have moved that timeline to just 7 days.
How Do Pre-Authorizations Affect Merchants?
Once a pre-auth expires, the funds do not automatically become available to the cardholder. The merchant is responsible for actively “reversing” the pre-auth in order to release the funds back to their customer. If a merchant is not active in performing this task, Visa will levy fees against the merchant.
To automate this process for merchants, Helcim’s payment gateway has been programmed to auto-reverse pre-authorizations that are still sitting in reserve after 7 days. This way, you and your customers can rest assured that their pre-authorized transactions are being taken care of and you can be confident you’re adhering to the card brand rules.