Looking at payment network products and capabilities: pre-authorization.

Taking a closer look at pre-authorization, one of many payment network capabilities. How does this work, what use does it have and why is it important?

Looking at payment network products/capabilities: 𝗽𝗿𝗲-𝗮𝘂𝘁𝗵𝗼𝗿𝗶𝘇𝗮𝘁𝗶𝗼𝗻.

Pre-authorizations are a separate ISO 8583 transaction type, defined by a separate 𝗮𝘂𝘁𝗵𝗼𝗿𝗶𝘇𝗮𝘁𝗶𝗼𝗻 𝗶𝗻𝗱𝗶𝗰𝗮𝘁𝗼𝗿. They allow merchants to confirm that cardholders will be able to complete a transaction when the final transaction amount is unknown at the time of the transaction. And when only an estimated amount (or in some cases an initial or maximum allowed amount) can be determined by the merchant. Depending on the cardholder's available funds, the issuer can approve a partial amount instead of the requested pre-authorization amount. Pre-authorization is a useful practice for merchants in both Card Present and Card Not Present transactions, especially in 𝗶𝗻𝗱𝘂𝘀𝘁𝗿𝗶𝗲𝘀 𝘁𝗵𝗮𝘁 𝘀𝘂𝗽𝗽𝗼𝗿𝘁 𝗮 𝗱𝗲𝗹𝗮𝘆 between transaction authorization and settlement, such as Automated Fuel Dispensers (AFDs), hotels, rental services, as well as some EV charging implementations.

The pre-authorized amount is reserved or "put on hold" on the cardholder's credit or debit card and reduces the "open to buy" (amount that can be used for other purchases) until the pre-authorization is finalized. Therefore, it's necessary to 𝗳𝗶𝗻𝗮𝗹𝗶𝘇𝗲 𝘁𝗵𝗲 𝗽𝗿𝗼𝗰𝗲𝘀𝘀𝗶𝗻𝗴 of a pre-authorization as soon as the final amount is known and to be cleared and settled within/up to 30 days usually. For some industries or Merchant Category Codes (MCC) this 𝘃𝗮𝗹𝗶𝗱𝗶𝘁𝘆 𝗽𝗲𝗿𝗶𝗼𝗱 is reduced to prevent an unnecessarily long hold on the cardholder's funds as they have much shorter transaction completion times (AFDs 60 minutes to two hours, EV charging 24 hours to seven days, etc.). In some cases, the validity period may be extended by either performing a reversal and re authorization or by leveraging a (zero amount) incremental authorization.

But what if the 𝗳𝗶𝗻𝗮𝗹 𝗮𝗺𝗼𝘂𝗻𝘁 is different from the pre authorized amount? In that case the merchant has several options:

➡️ transaction cancelled? ⇒ full reversal

➡️ final amount = pre-authorized amount? ⇒ (final advice message and) direct clearing

➡️ final amount < pre-authorized amount? ⇒ partial reversal and then clearing

➡️ final amount > pre-authorized amount? ⇒ incremental authorization(s) and then clearing

➡️ final amount = tolerance × pre-authorized amount? ⇒ some payment networks allow a pre-authorization to be directly cleared if the final amount is within a tolerance percentage of the pre authorized amount (e.g., 115%).

For 𝗽𝗮𝘆𝗺𝗲𝗻𝘁 𝗻𝗲𝘁𝘄𝗼𝗿𝗸𝘀 it is essential to publish 𝗰𝗹𝗲𝗮𝗿, 𝗽𝗿𝗮𝗰𝘁𝗶𝗰𝗮𝗹 𝗴𝘂𝗶𝗱𝗮𝗻𝗰𝗲 for pre-authorization processing.

Consistent rules allow each merchant vertical to finalize pre-authorizations quickly, enabling issuers to release holds without delay, preventing cardholder funds from being tied up longer than necessary and reducing the risk of disputes.