Picture this: you check into a hotel, give them your card, and before you so much as swipe into your room a few hundred dollars are being “held” on your account. Or you stop by a gas station, fill up $30 of gas, but see your bank app has placed a $75 hold on your account. That hold on your money isn’t a mistake it’s called an authorization hold.
For merchants, how does authorization holds work? It can be the difference between seamless customer journeys and angry complaints, avoided chargebacks and sudden disputes. This article explains authorization holds in simple terms — what they are, how they work, the pros and cons, and what merchants need to do to manage authorization holds successfully.
What Are Authorization Holds?
In the most basic terms, authorization holds are temporary holds placed on funds for a customer, after a transaction is created but before it is finalized. Essentially, its a “hold” on the funds to assure the customer has sufficient funds to cover the charge.
The money will not leave the customers account and head to the merchant immediately which is what happens during finalized charge. Instead, the issuing bank places a hold on those funds, so they cannot be spent elsewhere until the transaction is either fulfilled, or the hold expires.
For example:
- The hotel does a pre-authorization for the amount of stay estimated plus some for incidentals.
- Gas stations may have a higher default limit because they often do not know how much fuel the customer actually buys.
- Any pre-orders on e-commerce stores may have their funds on hold until the product gets shipped.
At their core, authorization holds are just a matter of risk management: ensuring merchants get paid while allowing customers some breathing room.
The Mechanics: How Authorization Holds Work
Now, let us understand the step by step process of what happens behind the scene regarding the authorization holds.
- Customer initiates a transaction – The customer swipes, taps, or enters the card information.
- Merchant sends request – Before the transaction request is processed it goes to the acquiring bank.
- Card network routing – The request is routed through Visa, Mastercard, Amex, or another network.
- Issuing bank checks funds – The bank verifies available balance and fraud signals.
- Authorization granted – Funds are “held” but not yet transferred.
- Settlement – The hold is either captured as charge, or its released once final amount is known.
This is where your payment processor plays its role. They link the merchant to the banking networks, ensuring that the request is passed along seamlessly and that the proper amount is captured/released.
This whole cycle takes place in a matter of seconds, but the outcome a transaction waiting to be confirmed lingers for days.
Common Use Cases for Authorization Holds
Authorization holds are an industry standard. Here are some everyday examples:
- Hospitality (Hotels & Resorts): A hold of $500 to ensure coverage for your stay, mini-bar and damage.
- Car Rentals: Places a hold to protect the rental company from unpaid fees, lack of fuel or damage.
- Gas Stations: A $75 or $100 hold is placed on the funds before pump approval for final fuel charges.
- E-commerce Pre-orders: Funds from merchants are tied to making sure buyers are serious before shipping.
- Service Industries: This includes gyms, salons, and even medical offices, which use holds from time to time for larger bookings.
So these use cases highlight authorization holds in industries when final amount is not known upfront, or where risk of cancellation/no shows is high.
Benefits of Authorization Holds for Merchants
Why should merchants use authorization holds? The advantages are significant:
- Risk Reduction: As payment is first secured, holds also decrease the risk of non-payment, or chargebacks.
- Cash Flow Security: Even if there is no transfer of money, you know that the customer has the money. This predictability helps with planning.
- Customer Commitment: Holds prevent customers from cancelling or not showing up, since they are now financially committed.
- Operational Flexibility: It enables merchants to set the final amount of the transaction later (which is great for hotel and rental industries).
In businesses that operate in a high-risk niche, authorization holds are a safety net.
Risks and Downsides for Merchants
But there are challenges for authorization holds as well:
- Customer Confusion: A lot of shoppers do not understand why the cash gets “hold.” That can translate into customer complaints or loss of faith.
- Delayed Access to Funds: Cash flow timing can be unpredictable because funds do not move immediately.
- Expired Holds: A charge hold expires if not captured within the set duration and you would need to run the charge again
- Negative Customer Experience: Customers might feel inconvenience, particularly if the hold is greater than the ultimate transaction.
Managing authorization holds well means weighing these downsides carefully against the protection they offer.
Best Practices for Using Authorization Holds
These practices can help provide the best customer experience possible while still getting the most out of authorization holds:
- Communicate Clearly: If you are placing a hold, tell the customers how much and when it will be released, upfront.
- Set Realistic Amounts: Don’t over-hold funds. Such as a $300 hold for a $100 service. This is ridiculous.
- Train Your Team: Staff should know how to explain authorization holds to avoid confusion.
- Track Expiration Dates: Holds have expiration dates (typically 7 days, but varies). Keep an eye on them, so that you do not lose any chances of payment.
- Automate When Possible: Leverage automation with tools that automatically locks funds or releases funds based on certain conditions.
If you follow these steps, authorization holds will remain a protective measure—not a headache.
Legal and Compliance Considerations
Card networks and banks set strict rules around authorization holds:
- Time Limits: Visa often allows up to 7 days for holds on retail transactions, while hotels and rentals may get longer.
- Disclosure Requirements: Merchants must be transparent about holds at the time of transaction.
- PCI DSS: Any system handling cardholder data (including holds) must be PCI compliant.
Failing to follow these rules can result in disputes, fines, or even loss of merchant privileges.
Future of Authorization Holds in Digital Commerce
As payments evolve, what’s the future of authorization holds?
- Real-Time Payments: Faster settlement systems may reduce the need for long holds.
- Mobile Wallets: Apple Pay, Google Pay, and others integrate holds seamlessly, making them less noticeable to consumers.
- Open Banking: Direct bank-to-bank payments could bypass traditional holds entirely.
Still, in industries where uncertainty exists (like hotels or rentals), authorization holds will likely remain a key tool.
Conclusion
Authorization holds are one of those behind-the-scenes processes customers rarely understand—but merchants can’t afford to ignore. They protect businesses, secure transactions, and prevent chargebacks. Yet, if mismanaged, they risk frustrating customers and damaging trust.
For merchants, the key is balance: use authorization holds strategically, explain them clearly, and stay within compliance rules. Done right, they can be one of your strongest tools for ensuring smooth and secure transactions.
FAQs on Authorization Holds
1. How long do authorization holds last?
Typically 3–7 days, but some industries (like hotels) may extend this period. The issuing bank ultimately controls how long the hold remains.
2. Can customers dispute authorization holds?
Yes, but it’s rare. Most disputes arise from confusion rather than actual fraud. Clear communication helps prevent issues.
3. Do authorization holds stop chargebacks?
Not entirely. They reduce risk by confirming funds, but customers can still dispute charges later.
4. Can small businesses use authorization holds?
Yes. Even small retailers can apply authorization holds, especially if they deal with pre-orders, deposits, or high-ticket items.
5. What’s the difference between a refund and releasing a hold?
A refund returns money after it’s been charged. Releasing a hold simply “unfreezes” funds that were never captured.
