Pre-Authorization

Pre-Authorization

Pre-authorization is a term frequently used in payment transactions. The technical term usually appears when goods or services are paid for with a credit card. Pre-authorization is very often used when checking into a hotel or renting a car. Pre-authorization provides the seller of goods or services with the assurance that the amount in question will be available on the account when it is debited.

Reservation on the credit card

First, it is checked whether the credit card presented exists at all, is not perhaps blocked and has its validity, and whether it can be charged with the amount to be booked at all. If both are the case, the requested amount is reserved on the credit card, i.e. it is set for a predetermined period of time (maximum 28 days). The duration of this period is determined by the payment provider. However, the name of the credit card holder is not checked. The credit limit is reduced by the respective amount with the pre-authorization, as the cardholder cannot dispose of the amount within this period. However, no booking is made at this time. If the reserved amount is not collected within the specified period, it will automatically be available again after this period. If the reservation period has expired, the respective booking can no longer be made. However, an amount reserved through Pre-Authorization can be cancelled again. When checking out of the hotel or returning the rental car, the reserved amount is then actually authorized.

Possible applications

Although the pre-authorization process is most commonly used for hotel bookings and car rentals, there are many other ways in which it can be used. For example, pre-authorization is always used when placing an order in an online store that is to be paid for by credit card. Pre-authorization can also be carried out for direct debits. In this case, the system checks whether the account number is valid for the check digit procedure of the respective bank and whether the specified bank code even exists. Pre-authorization is also carried out when paying with a debit or credit card at a fuel terminal. Depending on which card is used, a maximum amount of, for example, 80 euros (for the EC card) is reserved.

Advantage of pre-authorization

The process of pre-authorization is also called reservation, because the amount to be debited later is reserved on the account of the ordering party. It therefore offers security for the seller, as it ensures that the credit card to be debited is valid, that the credit card’s credit limit is not exhausted, and that a later debit can therefore be carried out successfully.