Pre-Authorization Charges: A Comprehensive Guide for Hotels & Businesses

Pre-authorization charges are a common practice in the payment industry, particularly for businesses like hotels. They essentially act as a temporary hold on a specific amount of money on a credit or debit card, verifying the card's validity and ensuring sufficient funds for a transaction.

For hotels, pre-authorizations play a crucial role in securing funds against potential incidental charges or damages. These charges help streamline the payment process and provide both the hotel and the guest with peace of mind.

How Do Pre-Authorization Charges Work?

Pre-authorizations are a proactive measure for businesses to ensure payment security. The process usually involves the following steps:

• The business initiates a pre-authorization request to the card issuer.
• The card issuer places a temporary hold on the specified amount from the cardholder's available balance.
• The actual transaction amount is later finalized, and the hold is replaced by the actual charge.
• If the final transaction is less than the pre-authorized amount, the unused funds are released back to the cardholder.

Pre-Authorization Charges and Credit Cards

Pre-authorizations function differently for credit and debit cards. When used with credit cards, pre-authorizations are a check against the cardholder's credit limit, not their bank account balance. This implies that the pre-authorization temporarily lowers the cardholder's spending power but does not directly affect their available funds until the final transaction is processed.

For debit cards, pre-authorizations affect the actual account balance, potentially triggering "insufficient funds" warnings for other transactions. The pre-authorization hold on a debit card is released when the actual charge is processed or when the hold period expires.

Pre-Authorization Charges at Hotels

Hotels commonly use pre-authorizations to secure funds for a guest's stay, including potential incidental expenses such as room service, minibar purchases, or any damage caused to the room. The hotel typically places a pre-authorization hold on the guest's credit card for a specific amount, ensuring that funds are available for any future charges. This practice safeguards the hotel against potential losses and ensures that they are compensated for the services provided.

Advantages of Using Pre-Authorization Charges for Hotels

Pre-authorization charges offer a range of benefits for both hotels and their guests:

• For hotels: Pre-authorizations provide financial security by confirming the availability of funds, reducing the risk of payment disputes or chargebacks.
• For hotels: Streamlining accounting processes and allowing for more accurate financial planning.
• For guests: Providing flexibility to cancel a reservation without being charged if the service is no longer needed.
• For guests: Enabling a check on the account's standing without immediately impacting the available funds.
• For guests: Preventing the risk of overspending, as the pre-authorization acts as a limit on the amount available for spending.

Other Businesses That Use Pre-Authorization Charges

Pre-authorizations are not limited to hotels. They are widely used in industries where the final transaction amount is not known at the time of service initiation. Here are some examples:

• Car Rental Services: Pre-authorizations are used to hold funds for the rental fee, insurance, and potential damage deposits.
• Petrol Stations: Pre-authorizations are employed for pay-at-the-pump services to verify that the card has sufficient funds to cover the fuel purchase.
• Restaurants: Restaurants, especially those offering a tab system, may use pre-authorizations to confirm payment methods before the final bill is tallied.
• Online Services and Subscriptions: Pre-authorizations are used for trial periods to verify the payment method, which will be charged if the subscription continues beyond the trial.

Pre-Authorization Charge Duration

Pre-authorization holds typically last for about 5 to 7 days but can vary depending on the card issuer's policies and the type of transaction. Some banks may keep the hold for up to 14 days, while hotels and car rental companies may hold funds for up to 30 days.

The duration of the hold is important for both businesses and cardholders. Businesses need to know how long they can rely on the pre-authorized funds, while cardholders need to be aware of the temporary reduction in their available funds. This information helps both parties manage their financial resources effectively.