What is an Authorization Only Transaction?

What is an Authorization Only Transaction?

Credit card processing looks very simple to most customers. The shop or store swipes the card. The word “approved” appears, and they are given a receipt. What those customers and even most merchants don’t see in their merchant accounts is the sometimes rather complex series of steps required to get from handing the product to the cashier and walking out the door.

The first thing the merchant’s payment system must do is determine if the account they are attempting to bill the purchase to is a valid account. The method most merchants and payment networks use for credit card processing is called an “authorization.” If the account authorization comes back as approved, it can be presumed that account is valid and will allow charges to be billed against it.

Sometimes, however, the merchant or shop selling the product isn’t quite sure what the actual costs are going to be until a later time. The merchant account still needs to authorize the transaction, because they still need to determine if the account is valid, but they can’t tell the bank they are billing what the exact amount is. The best example of this kind of transaction is when a guest checks in to a hotel. Between pay-per-view movies, room service and Internet charges, a guest may end up with $100 or more in additional charges over and above the cost of the room itself. The longer the guest stays, the more likely it is the amount will change.

In a situation like this, the hotel is likely to obtain an “authorization only” transaction. This is a transaction for no actual money that is designed to obtain authorization against an account to verify it is eligible, but to hold off on specifying an amount until the amount transaction itself is determined.

Essentially what the hotel is doing in this situation is taking the first two steps of a five-step process and then freezing the transaction until a later date when the remaining information can be filled in and the remaining steps can be completed.

These kinds of authorizations usually have an expiration date, so even if they are requested with a dollar amount attached, those funds are only held for a certain amount of time before the authorization expires and the funds are returned to the customer’s available credit (or balance in the case of a debit card).

As credit cards become more ubiquitous, it becomes more and more important that cardholders and merchants alike learn to understand the transaction and authorization process. Knowledge of how these things work is always the best first step towards efficiency and cost savings.