DEFINITION of Authorization Only
Authorization only is a type of transaction that creates a pending transaction in a cardholder’s account that is settled at a later date. When an individual makes a purchase with a credit or debit card, the institution from which the purchase is made has to seek authorization to process the transaction from the issuer of the credit or debit card. In an authorization only transaction, the selling institution only seeks permission to process a transaction; they do not actually process it. This results in a "pending" charge on the customer's statement. Authorization only, or auth only, transactions typically expire a short time after the transaction is completed.
BREAKING DOWN Authorization Only
When a customer makes a purchase using a credit or debit card, a request is made to the card issuer in order to obtain approval to process the transaction. This is referred to as authorization. The purpose of this authorization is to create a pending transaction that reserves a portion of the customer’s available credit, though the transaction itself is not fully processed.
Common Authorization Only Transactions
Authorization only transactions are most commonly used in transactions involving rentals and temporary holds. For example, a driver renting an automobile may have his or her card charged for a set amount for the rental car, even though this amount may later be adjusted. This charge is temporary, and may ultimately be replaced with a higher or lower charge once the car is returned. Hotels may also charge a fee to cover potential incidentals during a customer’s stay. If the customer doesn’t use room service or consumer a la carte items found in the room, then this fee will be returned.
Businesses may use authorization only sale transactions if an item that a customer wants is temporarily out of stock. The transaction would place a hold on the amount that the product costs while it is being ordered, with the transaction being finalized when the item is ultimately given to the customer.
Banks and financial institutions may charge a business using authorization only transactions a fee if the transaction is not finalized within a given period of time. Businesses have to weigh the possibility of incurring a fee with the financial benefits of placing a hold on a customer’s account.