Authorization holds protect businesses by preventing chargebacks and ensuring funds. They lock in transaction amounts so that merchants can receive payments once banks release the funds.

Proper knowledge of holds can equip merchants with a powerful way of preventing chargebacks. However, there are common mistakes businesses can make when it comes to authorization holds. Follow our guide to authorization holds to find out how you can use them with maximum efficiency.

What is an Authorization Hold?

An authorization hold is a lock on transaction funds. This way, banks can ensure payments go through even before they release them to merchants.

Why aren’t Funds Released to Merchants Right Away?

The timeline of payment release depends on the type of transaction, card brand, merchant type, and other factors.

Most card-present transactions release payments to businesses on the same day as the purchase. This would mean that in-person transactions would most likely release funds to merchants right away.

Card-not-present transactions have holds that can last from a couple days to a month. Online and over-the-phone payments carry a higher risk of fraud than card-present transactions do. Placing holds on these purchases decreases the chance of card fraud and chargebacks.

Additionally, the nature of businesses such as lodging and restaurants have fluctuating payment amounts. The final transaction amount can be different from what a cardholder originally pays. They can include additional services or tip amounts.

Merchants Must Submit Transactions in the Appropriate Timeframes

Businesses are responsible for settling payments so that banks can release funds. Card brands have hold period standards that vary depending on the industry and transaction type.

Late submittals can result in fees and loss of revenue.

How Do Merchants Release Holds?

The amount of leeway merchants have in placing holds depends on their industry. Businesses working in lodging, vehicles, and rentals have 31 days to submit transactions. Once transactions are submitted, banks release authorization holds.

The majority of card-not-present transactions have 7 days to be submitted.

What Happens When Merchants Don’t Submit Transactions On Time?

Let’s say a business submits transaction batches at the end of the week. A recordkeeping mishap occurs and a couple of transactions were not submitted along with the batch. The business had 7 days to settle these transactions, and now it’s been more than 7 days from the transaction date.

The business may get hit with a “misuse” fee. These fees are only a few cents each, but a batch of missed transactions can make for a hefty fee. The business is still responsible for settling the missed transactions as soon as possible.

How Do Authorization Holds Prevent Chargebacks?

Most businesses don’t settle transaction batches everyday. Without holds, the payment amount on cardholders’ accounts may be gone by the time transactions are settled. Holds guarantees that the merchant will receive payments.

Because a transaction is not final when on hold, this gives businesses a few days to refund or reverse transactions when needed. This can prevent clients from submitting disputes when businesses can quickly refund by simply releasing the hold.

Holds also protect merchants and customers from the impact of fraudulent transactions.

Want to Further Decrease Your Chargeback Ratio?

Now you know the importance of authorization holds and the benefits of using them. You can further prevent chargebacks by using tools such as Chargeback Alerts. Learn more by contacting RevitPay today.