Running a business can be fun and fulfilling, but as every entrepreneur knows, it’s important to protect ourselves from acts of fraud. Payment card pre-authorisation is one way to potentially enhance the security of the payments you take from customers.
What is pre-authorisation?
A pre-authorised transaction is where you take a deferred payment, rather than an immediate full payment, when a customer buys a product or service from you. When a purchase is pre-authorised, there is a holding period – often around five days – where you, the merchant, have the opportunity to manually convert the deferred transaction into a payment.
During this period, you can check that the payment is genuine, but unless you complete the full authorisation during this period, the funds will be released back to the customer.
What are the benefits of pre-authorisation?
Taking pre-authorised payments means you could potentially protect your business in a number of ways. Here is the case in favour of pre-authorised transactions:
- You may be able to fight fraud by ignoring any online payments that appear fraudulent, and waiting rather than despatching a product immediately. By waiting for the holding period to expire, the money will be returned to the ‘customer’ if you have any suspicions.
- Pre-authorisation may also help prevent chargebacks. A chargeback is where a refund claim is made; sometimes, customers mistakenly make a claim if they don’t remember or recognise a purchase on their bank statement, known as ‘friendly fraud’. But customers may also make a chargeback claim in genuine cases where they are the victim of a criminal act; for instance, someone may have stolen their card and spent money. With pre-authorisation in place, the window gives you the opportunity to intercept any payments where issues may arise; for example, by checking that an email or shipping address is legitimate.
- With a pre-authorisation period, you could take the opportunity to replenish stock in order to fulfil the order and maintain a healthy inventory. Or if you’re out of stock, pre-authorisation means you may have the chance to cancel the transaction before the full payment is taken.
Should my business take pre-authorised payments?
Any business that sells products online or over the phone may wish to take pre-authorised payments as an added layer of security. You can choose whether to run every payment through pre-authorisation, or none. But generally speaking, pre-authorisation is a popular option where there is a risk of a no-show, or the prospect of extra charges being incurred.
For example, hotels and other accommodation providers often pre-authorise a debit or credit card. This is where you check-in as a guest, and the authorisation is for the estimated amount you might spend there, based on elements such as the room and refreshments. It means the hotel will have funds held in reserve during the guest’s stay; the ability to add extra charges for services used; and effectively means it’s less likely that the guest leaves without paying.
Similarly, car rental companies often pre-authorise payments as an estimate of the charges that will be submitted at the end of the car rental period, such as mileage, petrol and insurance. The pre-authorisation provides some financial cover if the vehicle is returned in poor condition, for example, at which point the rental company can apply extra charges.
The same is true of activity providers – such as bike or boat rental operators – where the risk of damage to equipment could be offset by holding the funds as a deferred payment. Moreover, a restaurant
may take a pre-authorised payment for large group bookings, and charge a non-refundable booking deposit, while some bars will now pre-authorise payments to ‘fund’ the bar tab and verify the card in case the person leaves without paying.
How to undertake a pre-authorisation
If you’re taking payments online or over the phone, here is a rough guide to pre-authorising debit or credit card payments.
- Use a payment gateway. With Tyl, (fees and eligibility criteria apply) you can take secure pre-authorised online payments through a hosted payment page that integrates with your website.
- Adjust your settings. The admin page on your shopping cart software or payment gateway may allow you to specify which type of transactions should be reserved until you review them.
- Capture the payment. Once you’re satisfied that a transaction is legitimate, you typically have around five days to ‘capture’ the authorisation, (which you will need to trigger) at which point the full payment is made.
This has been prepared by Tyl by NatWest for informational purposes only and should not be treated as advice or a recommendation. There may be other considerations relevant to you and your business so you should undertake your own independent research.
Tyl by NatWest makes no representation, warranty, undertaking or assurance (express or implied) with respect to the adequacy, accuracy, completeness, or reasonableness of the information provided.
Tyl by NatWest accepts no liability for any direct, indirect, or consequential losses (in contract, tort or otherwise) arising from the use of the information contained herein. However, this shall not restrict, exclude, or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.