What Is Authorization Only?
Authorization only is a type of payment card transaction that holds funds from a cardholder’s account for settlement 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 complete it. This results in a “pending” or “processing” charge on the customer's statement. Authorization only, or auth only, transactions may have an expiration date; for example, an authorization only transactions may expire seven days after the transaction is authorized.
- Authorization only transactions allow a merchant to reserve funds from a customer for payment in the future.
- Only half of the transactional process is undertaken upfront with an authorization only transaction.
- In authorization only, the merchant does not concede the issuer’s authorization until the final value is adjusted for the close of the sale, which then sends funds to the merchant’s bank.
- Authorization only transactions protect merchants with high-value inventory items or low-quantity inventory items.
- Authorization only transactions often have an expiration period; should a transaction not complete in this time, funds are released back to the customer.
Understanding Authorization Only
Authorization only is one type of transactional activity that can occur when a payment card is used. It is an alternative to standard processing procedures.
Typically, when a customer makes a purchase using a credit or debit card, a request is sent from the merchant to the card issuer, who responds with either an approval or decline. The merchant accepts the authorization, which triggers the issuer to send the transactional value to the merchant’s bank. In a standard authorization, the transaction is fully processed by the merchant at the point of sale and the funds are deducted from the cardholder’s account. It may take a few days for the funds to settle so payments may show as processing.
With authorization only activity, the merchant does not concede the authorization approval to move the transaction to the final steps of completion. The transaction is instead left open by the merchant’s payment system. Transaction terms may differ depending on agreements. For example, some merchants may agree to keep a transaction open for approximately 30 days. However, in some cases, the funds are held for a shorter period. In this example, they may only be held by the issuer for seven days.
Once the merchant has determined a final value to charge the cardholder, then it takes the final step to send the transaction through on its end. This is followed by the routing of the funds from the issuer to the merchant’s bank for the final adjusted value. During the authorization hold, a specified value is reserved from the cardholder’s available balance, making those funds inaccessible for use.
Merchants have the power to withhold their concession of a transaction until it has been adjusted for the close of sale.
Common Authorization Only Transactions
With an authorization only transaction, only half of the transactional process is undertaken. These types of authorizations are usually only used in specific situations. Sometimes it may be to provide a form of deposit for a merchant.
Take one example of a rental car transaction. A driver renting an automobile may have their card authorized to hold an amount that exceeds the rental charge. The rental car company requests authorization from the issuer for a specified value, but when approval is received, it does not complete the transaction. Once the car is returned, the reserved fund value is adjusted. In the case of a car rental, the final value is usually only for a fraction of the total reserve. However, if the car is damaged—or if additional fees are charged—then the final transacted value will be higher. At the time of return, the rental car company adjusts the value and submits a concession for the adjusted amount.
Hotels may also charge a reserve fee to cover potential incidentals during a customer’s stay. At a hotel, funds may be charged for room service or à la carte items found in the room. Just as with the rental car, the final amount taken from the cardholder’s account is adjusted when the guest checks out.
Also common are short authorization holds used by gas stations and restaurants that allow cardholders to add tips.
Businesses may also 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.
For a consumer, it is important to be aware of authorization only charges. An authorization only holds funds from the cardholder’s account until the actual amount is adjusted or potentially released if no transaction occurs. During the hold, the funds are deducted from the cardholder’s accessible balance.
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. Thus, businesses have to weigh the possibility of incurring a fee with the financial benefits of placing a hold on a customer’s account.
Be mindful of how an authorization only transaction may be confusing or frustrating to an unsuspecting customer. Though there are many benefits to a merchant, this type of transaction may be problematic to a customer.
Authorization Only vs. Other Transaction Types
Most payment card transactions are standard, involving an immediate authorization and final completion at the point of sale. Any company using payment card technology will have basic functionality to request authorization and make final concessions for their payment processing. However, some other alternative, functional activities may also be needed in special scenarios like some of the following:
Void: Merchants have the option to void a transaction before it has been completed. This allows the merchant to nullify the charge. Typically, no fees from processing apply in this situation. The merchant may nullify the transaction altogether or immediately redo it.
Refund: A merchant may need to refund a cardholder. This type of transaction occurs after full settlement has completed. The merchant must process a transaction in reverse, which sends money from the merchant’s bank back to the cardholder’s issuing bank.
Verification: A verification transaction can be done to provide proof that a card is valid. This type of transaction may not have any value at all. Sometimes a small amount is shown on a cardholder’s account. This amount may need to be entered by the cardholder for verification. In a verification, no funds are taken from the cardholder’s account and only a very small amount is reserved.
Advantages and Disadvantages of Authorization Only Transactions
Pros of Authorization Only
The obvious advantage of authorization only transactions is to reduce fraud risk. Authorization only transactions can help reduce the risk of fraud by ensuring that the card being used for payment is valid and has sufficient funds. It also allows merchants to verify the identity of the customer before finalizing the payment.
Authorization only transactions also allow business owners to reserve funds for a transaction before the payment is actually processed. This can be especially important for high-value transactions or when there is limited inventory. Though a detriment to a consumer, this benefit further protects vendors with limited physical goods.
Authorization only transactions can also help merchants manage their cash flow by reducing the time it takes to receive funds. This is because the payment processor has already obtained approval for the transaction, and the funds are simply waiting to be processed.
Lastly, authorization only transactions may sometimes reduce chargebacks by verifying the validity of the card. This ensures that the transaction is actually being incurred by the true customer that claims to be the cardholder. This can help prevent fraudulent chargebacks which can not only slow down the churn of inventory but may result in lost funds or additional expenses for merchants.
Cons of Authorization Only Transactions
There are also numerous downsides to authorization only transactions, most of which occur on the consumer side. The biggest disadvantage of authorization only transactions is that they hold funds from the customer's account. This may be especially troublesome if the customer has a limited credit line or if the transaction is large. These transactions can be frustration, confusing, and limiting to the customer's ability to make other purchases or payments.
As mentioned before, authorization only transactions typically have a limited time frame. If the transaction is not completed within that time frame, the authorization expires. When the authorization expires, the funds are released back to the customer's account. This can be an issue if the transaction is delayed or if the customer's account is already at its limit.
Authorization Only Transactions
Often reduces fraud risk by verifying customer information before finalizing payment
Usually holds funds which protects merchants
Expedites certain steps of the cash transmission process, allowing for better cashflow
May reduce or eliminate chargebacks
Places a hold on funds for customers
May result in a customer's inability to access funds or process other payments
Usually have an expiration date
May cause confusion or frustration for those unaware of the transaction type
What Does Authorization Only Mean?
Authorization only transactions mean a payment is still processing until authorization has been completed. When you enter into an authorization only transaction, the funds used to make the purchase are put on hold to protect the merchant and ensure fraudulent activity is not occurring.
How Long Does It Take for an Authorization to Clear?
There is unfortunately no single time limit for all authorizations to clear. The characteristics of the transaction dictate how long it will take. Factors that contribute to how long an authorization is posted include the merchant's merchant category code, the card network, and type of payment card. As mentioned earlier, debit card transactions may have holds roughly one week long.
Is an Authorization a Charge?
Technically speaking, an authorization is not a charge. You do not pay for an authorization. Instead, you may see an authorization hold in addition to a pending payment for the full purchase amount of a good. When your authorization clears, the authorization hold is usually released and your order moves forward (with the full amount of the transaction having been posted in the other transaction).
The Bottom Line
An authorization only transaction is a type of payment transaction where the processor obtains approval from the customer's credit card issuer to reserve a certain amount of funds without actually processing the payment. This is done to verify the card is valid and has sufficient funds. It's a process often used where merchants need to ensure protection of high-value transactions or low-quantity inventory.