Introduction
Authorization Hold is a banking and finance term referring to the temporary holding or blocking of funds in a bank account or credit card before the final settlement of a transaction. This practice is commonly used in various financial transactions to ensure the availability of funds and manage the risk of insufficient funds.
Historical Context
The concept of authorization hold emerged alongside the evolution of electronic payment systems and credit cards. Early credit card systems in the mid-20th century laid the groundwork for the modern authorization hold process. As technology advanced, particularly with the advent of electronic payment processing in the 1980s, the practice became more sophisticated and widespread.
Types/Categories
1. Credit Card Authorization Hold: This is the most common type, used by merchants to ensure that the cardholder has sufficient funds available for a purchase. The hold remains until the transaction is either completed and settled or canceled.
2. Debit Card Authorization Hold: Similar to credit card holds, this type ensures that the funds in a bank account are sufficient to cover a pending transaction. It reduces the available balance but does not yet transfer funds.
3. Hotel and Car Rental Holds: These are specific types of holds used by hotels and car rental companies to guarantee payment for potential charges, such as damages or additional services.
4. Pre-authorization Hold: Often used at gas stations or by service providers, this hold ensures funds availability before the actual transaction amount is known.
Key Events
Mid-20th Century: The introduction of credit cards begins to standardize the process of authorization holds.
1980s: The rise of electronic payment systems and the increased use of debit cards lead to the refinement of authorization hold practices.
1990s-2000s: Online transactions and e-commerce surge, further embedding authorization holds in everyday banking operations.
Detailed Explanations
When a customer initiates a transaction, the merchant requests authorization from the issuing bank. If approved, the bank sets aside the amount from the customer’s available credit or funds. This amount is “held” and reduces the available balance but does not yet debit the account. The hold remains until the merchant submits the transaction for settlement or releases the hold.
Mathematical Formulas/Models
The formula for calculating the new available balance after an authorization hold is:
Charts and Diagrams (Hugo-compatible Mermaid format)
sequenceDiagram
Customer->>Merchant: Initiates Transaction
Merchant->>Bank: Requests Authorization Hold
Bank->>Merchant: Authorization Approved
Bank->>Customer: Funds Held (Reduces Available Balance)
Merchant->>Bank: Submits Transaction for Settlement
Bank->>Merchant: Funds Transferred
Bank->>Customer: Hold Removed
Importance and Applicability
Authorization holds play a critical role in managing risks associated with non-payment and overdrafts. They are particularly vital for merchants, financial institutions, and consumers, ensuring smoother, more secure transactions.
Examples
- Hotels: A hotel might place an authorization hold on a guest’s credit card upon check-in to cover potential room charges and incidental expenses.
- Gas Stations: A gas station might place a hold for a pre-determined amount before the actual cost of fuel is known.
- Online Retail: An online retailer places a hold to ensure funds are available before shipping the product.
Considerations
- Duration: Authorization holds are temporary, typically lasting a few days to a week.
- Impact on Funds: Holds reduce the available balance but do not affect the actual account balance.
- Releases: Holds are automatically released after the settlement or cancellation of the transaction.
Related Terms with Definitions
- Settlement: The process of transferring funds from the cardholder’s bank to the merchant’s account after a transaction is completed.
- Credit Authorization: The process of verifying that a credit card has sufficient credit available for a transaction.
- Overdraft: When a bank account’s available balance falls below zero due to insufficient funds.
Comparisons
- Authorization Hold vs. Settlement: Authorization hold is the temporary reservation of funds, while settlement is the actual transfer of funds.
- Credit Card Hold vs. Debit Card Hold: Both function similarly, but credit card holds affect the available credit, whereas debit card holds affect the actual bank account balance.
Interesting Facts
- Hotels and car rentals typically place larger holds due to potential incidental charges.
- Some gas stations may hold more than the actual purchase amount to ensure coverage for maximum fuel purchase.
Inspirational Stories
Imagine a small business owner who utilizes authorization holds for large online orders. By ensuring funds availability through holds, the owner successfully mitigates the risk of non-payment and significantly improves cash flow, enabling business growth and stability.
Famous Quotes
“A budget tells us what we can’t afford, but it doesn’t keep us from buying it.” - William Feather. Authorization holds are a practical tool to help individuals and businesses manage their expenditures better.
Proverbs and Clichés
- “A penny saved is a penny earned.” Ensuring funds availability through authorization holds prevents overspending.
- “Better safe than sorry.” Authorization holds provide a safety net against insufficient funds.
Expressions, Jargon, and Slang
- Pre-auth: Common slang for pre-authorization hold.
- Pending Transaction: A transaction that is awaiting settlement, often linked with authorization holds.
FAQs
Q1: How long does an authorization hold last? A: Authorization holds typically last between 1-7 days, depending on the merchant and bank policies.
Q2: Can an authorization hold affect my credit score? A: No, authorization holds do not impact your credit score. They temporarily reduce available credit but do not constitute actual debt.
Q3: What should I do if a hold isn’t released? A: Contact your bank or the merchant if an authorization hold isn’t released within the expected timeframe.
References
- Visa USA, Inc. (2011). “Visa Authorization Processing.” Retrieved from Visa.
- Federal Reserve Bank of San Francisco. (2021). “Understanding Holds on Your Account.” Retrieved from Federal Reserve.
Summary
Authorization hold is a pivotal mechanism in modern banking and financial transactions, offering a safeguard for merchants and consumers alike. By temporarily reserving funds before settlement, it ensures that transactions are secure and that funds are available, ultimately contributing to a seamless and reliable financial system.
