The Difference Between a Pre-Authorization Hold vs Capture

Payment processing is, ideally, invisible. The companies authorizing, processing, and managing payments should be settled in the background, functioning to keep the monetary world running smoothly.

Unfortunately, it doesn’t always work out that way. That means, as a merchant, you should have some understanding of how the payment processing works. That way, you can know when something is working properly, and when something is going wrong.

I’ve already talked some about pre-authorization holds, but there’s a related part of the payment processing system that’s worth knowing, despite how similar it is. Today, I want to talk about the difference between pre-authorization holds, and capture.

What is a Pre-Authorization Hold?

There are, broadly speaking, two kinds of transactions where a credit card is involved. The kind where you know the total of the purchase, and the kind where you don’t.

When a customer goes to Amazon and wants to buy a book or TV or whatever, they add the item to the cart. The price of the item, any taxes, and shipping fees are calculated, and a total is presented to the customer. The customer submits the transaction and Amazon runs their credit card for the value of the purchase.

Compare that to a common transaction we’ve all made: purchasing gas. When you put your card in the gas pump, neither you nor the gas station has any idea how much gas you’re going to put into your car. It could be $5, it could be $45; either way, you’re running your card before the final value of the transaction is known.

In order for the merchant to be assured that they’ll get paid for the gas you pump, they need your card information queued up and ready to submit when they process their transactions. The merchant can’t run the transaction when you insert your card, because they don’t know the value. What happens, instead, is a pre-authorization.

A pre-authorization is effectively a message from the gas station (or restaurant, or hotel, etc.) to the credit card company sent via payment processor saying “hey, this customer is making a purchase, we’ll let you know how much it is later. Are they good for $X?”

This hold might be $1, or $50, or $200, depending on the kind of transaction it is. It flags a certain amount of money as unavailable, as a sort of placeholder for the final transaction later. The amount of the hold isn’t necessarily important, but it, along with the merchant’s ID, gives the credit card company enough information to guess roughly how much the final transaction will be, and check if the cardholder has enough money or credit limit available to handle it.

When the credit card company responds “all good” and sets the hold, the customer’s card is released and you can now pump your gas. The final total is noted and added to the gas station’s queue for processing in batches later, at which point the hold is released and the transaction is processed using the actual value of the purchase.

What is Capture?

Capture is essentially the next step after an authorization hold. It happens for both kinds of transactions above.

Effectively, capture is the moment money changes hands from the cardholder’s account to your account as a merchant.

Let’s look again at how a typical transaction occurs.

From the customer’s point of view, it’s quite simple.

• The customer picks the product they want and adds it to a cart, be it physically in a store or digitally online.
• The customer inserts/swipes/taps their card to process a payment for the value of their card.
• The customer is given a receipt and the product, or confirmation of the order before the product enters the fulfillment process and ships.

From the back end, though, the process is a lot more complex.

• The customer makes an order, sending information to the merchant.
• The merchant sees the order and sends a payment request to the merchant payment gateway.
• The gateway sends an authorization request for the funds to the merchant’s bank and forwards it onwards to the credit card company.
• The credit card company examines the transaction and, if it doesn’t look obviously fraudulent, passes on the authorization request to the customer’s bank.
• The customer’s bank looks at the request and determines if the customer has the money or credit limit to handle it. If so, they hand back the authorization to the credit card company.
• The credit card company passes this information back to the merchant’s bank.
• The merchant’s bank passes this back to the gateway, and sends confirmation to the merchant.
• The merchant can then send the order confirmation notice back to the customer.

In the case of a transaction of unknown value, or with a delayed capture, the authorization is the only data sent back. In the case of a transaction of known value and immediate charge, the customer’s bank sends the funds to the card company, which sends the funds to the merchant’s bank. When the money is sent, this is called capture, because you as the merchant are capturing those funds.

Most of this happens behind the scenes for both the customer and the merchant, and ideally, neither party needs to know how it all works as long as it’s running smoothly. Even when it doesn’t work, such as if the customer doesn’t have the funds or the transaction trips fraud flags, error codes and software designed to handle them make it easy to handle. But, with hundreds of millions of transactions processed every day, the chance for an issue cropping up, however small, approaches a guarantee.

All of that aside, the simple version is this: capture is the point where money is exchange from the customer’s account to the merchant’s account.

The Differences Between Pre-Authorization Holds and Capture

There are a few important differences between these two moments in monetary processing. It’s worth knowing how it all works, so if your customers have questions, you can answer them effectively.

The Purpose

The most obvious difference is in the purpose of the element.

Pre-authorization holds are just a question and answer. You ask the customer’s bank if they’re good for the money, and the bank says yes or no.

Capture, meanwhile, is simply the transferal of that money when the transaction completes.

The Timing

One big difference is in timing.

A pre-authorization hold is initiated the moment the card is processed. It can linger on the customer’s account for up to 31 days, which is the maximum allowed by law; by that point, it will either expire and the funds will be released to the customer, or it will be settled and the final funds captured. Many pre-authorizations are settled much faster, however, usually within one day or seven days.

Capture can happen immediately, or it can be delayed.

For example, as a merchant, you might have a guarantee that you won’t charge for a product until that product is ready to ship. This is sometimes seen for pre-ordering, where capture is delayed. That’s not always the case, though; some preorder systems are designed to use the capture as funding for the production of the product.

Another common example is a hotel stay. When a customer checks into a hotel, they have a pre-authorization hold put on their account to represent the transaction. But, the full number of nights, additional charges like room service or in-room amenities, and other fees aren’t assessed until the end of their stay. The hold is immediate, but the capture is delayed.

The Value

Another huge difference is in the value of the transaction.

Pre-authorization holds range all over the place.

• Small $1-$5 charges can be used for “free trial” pre-charges and age verification purposes.
• Larger $20-$50 charges can be used for gas stations to cover the usual transaction amount.
• Much larger $300 or more charges might be used by hotels to cover several nights of accommodations.

Critically, they are rarely the actual value of the transaction. They’re more likely to be in the same ballpark, as a way to ensure that the cardholder has the money to cover the full transaction, but that’s not always going to be the case.

For example, a gas station putting a hold of $50 could cover a normal transaction, but if the user is filling up multiple gas cans for home use, their transaction could easily exceed $100; the hold wouldn’t cover that full amount.

Capture, meanwhile, is the full price of the transaction. If the customer purchases $43.37 worth of gas, the capture is for $43.37 exactly.

Where the Money Goes

The fourth major difference is what happens to the customer’s money.

With a pre-authorization hold, the money is flagged in their account. If a person has a credit limit of $100 and an authorization hold flags $50, that person only has $50 of credit left to use.

This could have the potential to cause problems if an individual has near-maxed credit cards. Consider, for example, if they bought $20 worth of gas. If the authorization hold was $50, and they don’t realize it, they think they have $80 in credit available. But if they try to purchase anything higher than $50, the transaction will decline. This is only resolved when the hold is settled, the $50 is released and the $20 is captured.

Holds do not move the customer’s money. It’s more like removing cash from a wallet before going shopping. The cash is still there at home, it’s still the customer’s for now, but it can’t be spent while they’re out.

Capture, meanwhile, moves the funds. The customer’s account loses $50 and the merchant’s gains $50.

Chargebacks and Disputes

Finally, another major difference is whether or not the charge can be disputed.

Capture is a finalized transaction. If the customer feels like the transaction is fraudulent (or they want to commit fraud of their own), they can file a dispute and request a chargeback.

As discussed in a prior post, pre-authorization holds cannot be subject to a chargeback. If a customer does not believe an authorization hold is legitimate, they can dispute it, at which point their bank questions you as the merchant about it, and you can either release the hold or confirm the transaction with the customer to have them cancel the dispute.

Why is Knowing the Difference Important?

Because authorizations can appear as unusual charges to a customer, and because capture is not necessarily the same day as the purchase being made, the authorization and capture processes leave room for confusion and questioning.

The most important reason to know all of this for a merchant is to avoid as many chargebacks as possible. When there is a disconnect between what the customer expects and what they see, they might be inclined to file a dispute, and that can result in a chargeback even for legitimate transactions.

Since chargebacks are dangerous and expensive for a merchant, anything you can do to reduce the chances that they happen is a good idea. A big part of that is proper communication, whether it’s passive like how gas pumps have signs discussing authorization holds, or active like how hotel staff will talk about the hold when checking in.

Since you can’t properly communicate if you don’t understand how it works, learning the details of the financial situation we all operate within is critical.

The good news is, you have me to help. If you have any questions, browse my guides or simply reach out and ask, and I’ll do my best to help.

More importantly, Let’s talk about how to avoid chargebacks as much as possible. Through the FightDisputes system, we can alert you to any incoming chargebacks before they hit your bank. This gives you an opportunity to Contact the customer and ask them about it, potentially even reversing the dispute before it becomes a damaging chargeback.

If you aren’t sure how to approach that outreach, we can do that too. Through our managed replies, we can communicate with your customers on your behalf, helping to explain the transaction, validate if it was intentional and request a reversal of the dispute, or even offer a refund rather than the more expensive chargeback. The customer gets what they need, you avoid damaging chargebacks on your record, and everyone wins.

Just reach out and let me know what I can do for you.