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Pre-Authorizations and Expiries With Real World Example

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Danny Randell | May 19, 2021

“Pre-authorized transactions reserve a certain amount of funds from credit cards in order for the merchant to capture those funds.”
1 min read

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.

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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.

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