Pre-Authorization
What is Pre-Authorization?
Pre-authorization (pre-auth) is the initial step in the card payment process. Here, the merchant requests approval from the card issuer to ensure the customer has sufficient funds or credit available for a transaction. This process temporarily places a hold on the customer's account for the pre-authorized amount, but does not immediately transfer funds to the merchant. The pre-authorization hold acts as a temporary reservation of funds and remains active for a specified period (typically up to 7 days). If the transaction is not completed within this period, the hold expires and the funds are released back to the customer.
Why Use Pre-Authorization?
Pre-authorization helps merchants:
- Confirm the customer has sufficient funds before providing goods or services.
- Reduce the risk of chargebacks and fraud.
- Avoid processing refunds for unfulfilled or canceled orders.
Common Business Scenarios
Pre-authorization transactions are widely used in scenarios such as:
- Medical procedures and hospital admissions: Placing a hold on a patient’s card for estimated out-of-pocket costs before a procedure or admission. This ensures providers can collect payment for services not covered by insurance.
- Diagnostic tests and lab work: Holding funds for tests ordered in advance, ensuring payment before results are released and reducing billing friction.
- Recurring healthcare services: Verifying card validity and available funds for ongoing treatments such as physical therapy, home healthcare visits, or chronic care management.
Business Rules
- Pre-authorization transactions are applicable only for card payment methods .
- Payments that have been pre-authorized must be captured within 7 days; otherwise, the held amount will be released automatically.
- Amounts lower than 1 cent or with decimal values (e.g., $0.005) cannot be captured.
- The captured amount can be equal to or less than the pre-authorized amount, but not greater.
- Pre-Authorized Payments can be cancelled
- The payment is considered complete only after a successful capture and transfer of funds to the merchant