As a freelance worker cruising your way through the ever-growing gig economy, you’ve probably come across an authorized hold in your bank account. Often found after fueling up at gas stations, accommodation bookings, or online purchases, your transactions may be ‘on hold’ without you knowing it. And although these transaction statuses are temporary, they can be quite frustrating for those who want to better manage their day-to-day finances. But what is an authorization hold, exactly? Moreover, how long is a typical debit card authorization hold time? Well, we’re here to tell you all about it.
Visa Debit Authorization Hold
An authorization hold also referred to as an authorization charge or pre-auth temporarily freezes credit or money in a cardholder’s account. Businesses or merchants place these statuses on your transactions as a placeholder to ensure that you have the funds available to complete the purchase, especially when the final amount is undetermined (ex. gas stations) or not yet settled (ex. online shopping orders). The authorization hold locks in a fixed amount of your funds until the transaction is settled where the merchant receives the money they’re owed and the purchaser receivers the goods or services rendered.
These kinds of holds can be used on credit cards as well as debit cards and they work in pretty much the same way. More on that a little later. Oh, and each banking platform has its own debit card authorization process. At Moves, we provide added visibility into authorized holds to accurately reflect our members’ balance so that they can budget based on income that’s accessible to them at all times.
What’s the Importance of an Authorization Hold?
While these pre-authorization debit card holds can be a real pain, they do provide benefits and protection for merchants transacting business with customers. Aside from the protection against spending already-promised funds for a service, they also make refunds much easier. If there’s a problem with an order before it’s settled for any reason, the funds in the hold can be released. Doing so avoids the pains and hassles of processing any returns.
Returns aside, there are processing fees that only occur at the time a transaction is settled. Fewer settlements, therefore, mean fewer fees. For example, if there’s an issue of fraud or out-of-stock merchandise that isn’t discovered until after all transactions have been processed, you’ll have paid a transaction fee for no reason. Knowing what is an authorization hold and effectively utilizing these debit card holds are two of the best small business finance tips to have in the bag.
The final (and probably most important) benefit of a pre-authorization debit card hold is the avoidance of chargebacks. A chargeback is a debit card charge that has been reversed by a bank following a claim of abuse etc. from a cardholder to dispute a transaction. If the bank rules in favor of the cardholder, money is taken from the merchant and returned to the bank account. That’s got unpleasantry written all over it.
Customers have greater peace of mind knowing that their card won’t be charged before they receive and approve whatever the item is at hand. Think of the authorization charge as a screening process to certify “kosher” on both sides of the board – and then, everyone’s happy!
What is the process of authorization on debit cards?
The process for this procedure is rather straight-forward and mimics intuitive rationality:
- A customer uses a debit card to make a purchase.
- An authorization request is then sent to the corresponding bank of the cardholder.
- Granted that the card has sufficient funds, the bank will automatically put a hold on the amount for the transaction. If funds are insufficient within the account, the request will not be authorized at all.
- The transaction gets submitted for settlement to the merchant’s acquiring bank, which allows for the acquisition of digital payments. Such transactions are usually processed in batches.
- After moving through the necessary card networks, the temporary hold is replaced with a debit to the cardholder’s account
- The merchant’s account gets credited for the final transaction amount.
All the moving parts account for the delay of a few days it sometimes takes to verify and accept or reject a transaction.
How Long Does a Hold Last on a Debit Card?
So, how long can a merchant hold an authorization anyway? As we just mentioned, an authorization hold is not an immediate process. While on average a hold might last between 1-3 business days for debit card transactions, it can last up to 8 business days too. How long a debit card hold lasts depends on a few things such as the MCC (Merchant Category Code), the bank card brand, card network, transaction type, and more.
In light of these potential setbacks, card networks do their best to create reasonable systems that serve both customers (cardholders) and merchants alike. That means most card networks have regulations that offer enough time for merchants to settle transactions but don’t hold the funds of cardholders for too long.
If the card is present during a transaction, the hold usually won’t last any longer than 24 hours. For things like vehicle rentals and commuter transportation holds can (and usually) last for days – maybe a week at max on average. When a card is not present during a transaction (known as CNP transactions), such as online purchases, the hold will last longer than usual.
Also, if merchants cannot settle a transaction within the hold time, the transaction usually needs to be canceled. Such transactions could be resubmitted for processing, but it’s a troublesome undertaking. “Misuse fees” are also issued to merchants from card brands in the event of an expired authorization hold time.
What are the Setbacks of Authorization Holds?
The obvious drawback of authorization holds for cardholders is that full access to funds is limited during the time of the hold. It’s a little bit inconvenient, but it’s money that has been allotted to a cause already, so it’s a practical turnout.
The greatest risks and setbacks of an authorization hold fall on the shoulders of merchants. Aside from the threat of misuse fees which incentivize getting familiar with each card type, pre-auth holds require tight record keeping.
In the event of a duplicate hold due to a mistake when using multiple identity verification tools or test transactions, fines, fees, and chargebacks are usually imminent. And these are just a few common ways to fudge up an authorization hold and cause double holds.
Any big mistakes may lead to a damaged reputation and therefore a loss of business. While holds are a great tool for securing transactions in general, a stronger risk-management strategy is needed for the long game.
To learn more about authorization holds on your Moves Visa Debit Card, be sure to check out our Help Center article!