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 typically expire approximately seven days after the transaction is authorized.
- Authorization only transactions allow a merchant to reserve funds from a customer for payment in the future.
- With an authorization only transaction, only half of the transactional process is undertaken upfront.
- 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.
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. Most merchants can keep a transaction open for approximately 30 days, but typically funds are only held by the issuer for seven days. Terms may differ depending on agreements.
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: short authorization holds used by gas stations and restaurants that allow for 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.
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 it 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.