Authorization Hold

Authorization hold (also card authorization, preauthorization, or preauth) is the practice within the banking industry of authorizing electronic transactions done with a debit card or credit card and holding this balance as unavailable either until the merchant clears the transaction (also called settlement), or the hold "falls off." In the case of debit cards, authorization holds can fall off the account (thus rendering the balance available again) anywhere from 1–5 days after the transaction date depending on the bank's policy; in the case of credit cards, holds may last as long as 30 days, depending on the issuing bank.

Signature-based (non-PIN-based) credit and debit card transactions are a two-step process, consisting of an authorization and a settlement.

When a merchant swipes a customer's credit card, the credit card terminal connects to the merchant's acquirer, or credit card processor, which verifies that the customer's account is valid and that sufficient funds are available to cover the transaction's cost. At this step, the funds are "held" and deducted from the customer's credit limit (or bank balance, in the case of a debit card) but are not yet transferred to the merchant. At the end of the day, the merchant instructs the credit card machine to submit the finalized transactions to the acquirer in a "batch transfer," which begins the settlement process, where the funds are transferred from the customer's accounts to the merchant's accounts. Contrary to popular belief, this process is not instantaneous: the transaction may not appear on the customer's statement or online account activity for one to two days, and it can take up to three days for funds to be deposited in the merchant's account.

For example, if an individual has a credit limit of $100 and uses a credit card to make a purchase at a retail store for $30, then his available credit will immediately decrease to $70. This is because the merchant has obtained an authorization from the individual's bank by swiping the card through its credit card terminal. If the billing statement was sent out at that point, the actual charges would still be $0, because the merchant has not actually collected the funds in question. The actual charge is not put through until the merchant submits their batch of transactions and the banking system transfers the funds.

A debit card works slightly differently. Similar to the previous example, if one has a balance of $100 in the bank and used a debit card to make a purchase at a retail store for $30, then his available balance will immediately decrease to $70 as a hold on the $30 is enacted. This is because the merchant has obtained an authorization from the individual's bank by swiping the card through its credit card terminal. However, the actual balance with the bank is still $100, because the merchant has not actually collected the funds in question. However, unless this authorization hold expires without being finalized the user cannot access that part of their account. The actual balance will not be reduced until the merchant submits their batch of transactions and the banking system transfers the funds.