What is Credit Card Pre-Authorisation?

By EFTPOS NZ December 20, 2019 4 minutes read time

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Credit card pre-authorisation is a powerful feature you can use to protect your business from fraud and non-payment. A pre-auth puts a temporary ‘hold’ on funds on your customer’s card. You can then complete the transaction, once the service is completed or goods exchanged.

Why businesses should use credit card pre-authorisation

Most small business owners struggle to keep their business in the black week-to-week. The struggle is especially real for any business that offers their services based on consumption, or in advance of payment, because of the risk of theft by non-payment, or from fraudulent use of a credit card.

You could be the motelier who has turned down legitimate bookings only to lose a night's accommodation to a fake online booking. Maybe you're the bar owner cashing up at the end of the night only to discover a $250 tab left unpaid? Or maybe you're the dressmaker left out of pocket when their client refuses to pay to cover the full cost of hours and materials for a finished dress.

Using credit card pre-authorisation can help secure the revenue you expect to receive before you invest your time and resources into providing your services.

The best part? Credit card pre-authorisation might enhance your customer service offering and it's free.

How does credit card pre-authorisation work?

A credit card pre-authorisation is very similar to regular purchase, except that a pre-auth puts a temporary ‘hold’ on funds on your customer’s card instead of transferring the funds right away. Processing a credit card pre-authorisation confirms that your customer has enough credit available to pay the expected cost of your goods or services, and validates that the card isn’t blocked due to being stolen.

You can then complete the transaction once the service is completed or goods exchanged. You don't need your customer's card back to complete the transaction, which makes for a more convenient payment experience for your customers. Keeping track of your pre-auth receipts is therefore key to successfully implementing a credit card pre-authorisation solution in your business. You can learn more about managing pre-auth receipts here.

If you just want to confirm a card is valid without holding funds on the card, you can use Account Verify. This confirms the validity of a credit card without charging the card or holding funds. You don’t need the physical card to use Account Verify, so this is particularly handy if you use an online booking platform and want to confirm the card straight away.

Why not just take a deposit?

Taking a deposit isn’t always feasible for every business. The pressure is on to make booking or ordering from you as easy as possible thanks to high competition and the ease with which potential customers can shop around online.

If you use a third-party online booking system, you can’t always access credit card details indefinitely. If you choose to store credit card details you could be breaching PCI rules, but you can’t rely on online booking platforms to help recover lost revenue if your guests leave without paying.

Using credit card pre-authorisation instead can help guarantee your customer can cover their costs before you invest time, money and resources into providing your sought-after services – whatever they may be.

Who should use credit card pre-authorisation?

Any business that offers their goods or services in advance of taking payment will benefit from using credit card pre-authorisations to manage payments. Here are some ideas for using credit card pre-authorisation in your business:

Car rental

Use a pre-auth as a security deposit to ensure your customer has the funds to cover the insurance excess should the vehicle incur any damage during the rental period. Open the pre-auth in one location and retrieve and complete it at another when the customer returns the vehicle. Delayed charges can't be used to cover toll fees or speeding fines, but they can be used for late return fees, fuel fees and some admin charges. Include Account Verify in your pre-hire checks to ensure the card is valid.

Bar tabs

Offering bar tabs encourages customers to stay at your premises longer and increases average spend. But there is a risk of losing out on revenue if your customers 'do a runner'. Using credit card pre-authorisation reduces your risk of fraud and theft, while also making it easier for your staff to manage tabs and for your customers to order from you. Here's six reasons why bars should be using credit card pre-auths to manage tabs.

Accommodation businesses

As well as reducing the risk of fraud and theft, credit card pre-authorisation can help make check-in and check-out easier for you and your guests since they only have to present their card once. You can even offer an express check-out service! Account Verify can validate that a credit card number used to make an online booking is a valid card. Learn more about how accommodation businesses can use credit card pre-authorisation here.

How to get started

If you have a Verifone EFTPOS terminal getting set up to take credit card pre-authorisation is really simple. It's free to use and free to enable with a simple call to our customer services team (0800 EFTPOS, option 3).

We do recommend doing some pre-planning before you start taking credit card pre-auths, however. We cover off the four key things you'll need to do before you get started here.