An Authorization is a request made by a customer through a merchant to a credit card payment processor in order to approve the reservation of funds in a customer’s account. An authorization essentially reduces the customer cardholder’s credit limit, however, it does not actually capture the funds or charge the card used in the transaction. An authorization will largely be deleted after a period of up to two weeks. When a positive authorization precedes an actual sale of goods or services, it often is the case that the same or similar amount reserved will become the settlement total for the transaction. Ultimately, a settlement deducts the funds from the cardholder’s account.
In an Authorization, the request can involve several transaction types, such as an Auth, Pre-Auth, Post-Auth, Re-Auth, and RePre-Auth. All participants in the transaction chain – from the merchant retailer to the credit cardholder – have “stated” that they are ready, willing and ultimately able to complete a Sale, Refund or PreAuth.
In some cases, an Authorization is a transaction that is both is preauthorized and post-authorized in one step. This particular type of Authorization – or Auth – is used only to process purchases of services or merchandise that do not actually require physical postal or other shipment, such as a charitable donation, a seminar registrations, or what are referred to as “soft” goods that are delivered electronically over the internet, such as a video on demand or piece of software. An Auth is sometimes referred to as a sale.
An Authorization Only – or Auth Only – is a special type of sale transaction. It authorizes an amount on a customer’s credit card but the item does not settle until a later time, sometime several days or weeks. The purpose of an authorization only transaction is to reserve an amount against a card holder’s available credit limit for a certain period of time. For example, a merchant may perform an authorize only transaction if an item that is ordered is out of stock. Then when the item is in stock, the merchant will then settle the transaction and essentially charge the credit card at that time. Another reason a merchant may perform an authorization only transaction is when the exact amount to be charged to a card is not know at the time of the transaction. This is often the case in the hotel and lodgings industry. When a patron guest checks into a hotel, their credit card is often authorized for an amount greater than the estimated length of their stay. However, the transaction is not settled until the guest checks out of the hotel, in which the hotel may include any incidentals a guest may want to charge to his or her room. At the time of checkout, the hotel enters the actual final amount due and then settles the transaction and the credit card is charged.
One concern is that if an authorization only transaction is not settled within 24 hours, the transaction can downgrade to a different rate category so the merchant may be surcharged a small fee. However, the benefits – such as flight of clients or room damages – of using an authorization only transaction by a merchant usually outweigh any such additional resulting costs involved, since by performing the authorization, the merchant is ultimately guaranteed payment.