Other issues with authorization holds

Another issue that occurs on a regular basis with authorization holds is when the transaction amount changes between when the hold is placed on the account, and when the transaction is settled. This most commonly occurs in situations where the final debit amount is uncertain when the authorization is actually obtained.

For example, if an individual makes a gasoline purchase by swiping their check card or credit card at the gas pump without using their PIN, then the pump has no way of knowing how much gas will be used. The pump typically authorizes a fixed amount, usually $1 but sometimes up to $100, to verify that the card is legitimate and that the customer has funds available. When the transaction is settled, it will actually post for the value of the purchase.[1]

Another example can be seen with a restaurant transaction. If an individual spends $40 at a meal, the server does not know how large a tip they will leave, if they choose to leave one on the card. The restaurant's credit card terminal is typically set to authorize a larger amount, such as 20% above the cost of the meal, but the transaction will settle for the actual total including the actual tip written on the receipt. Some restaurants will authorize just the amount of the bill but the transaction will settle higher with the tip included. Acquirers sometimes forbid the practice of preauthorizing an amount including a tip, but will guarantee settlement of the amount authorized plus 15 or 20%.

Other establishments that may settle transactions for different amounts than were originally authorized include hotels and car rental agencies. The final cost of these transactions can be extremely unpredictable due to unforeseen extras such as room service charges, refueling charges, or longer stays. These companies typically place a hold on the customer's credit card at the beginning of the transaction for the estimated total plus a percentage or a fixed dollar amount (such as the estimated rental charges plus 15% or $250 — a policy many customers are not aware of). These types of establishments usually do not settle the transactions until after the customer has checked out or returned the rental car. Some hotels and car rental agencies do not accept Visa or MasterCard-branded debit cards, as the authorization holds can expire before the transaction is settled. Additionally, some of these agencies use the requirement of a credit card as a tool to screen high-risk customers, as credit cards usually require a good credit history, while all that is needed for a debit card is a checking account.

Another example of a transaction that may settle for an amount different from the amount authorized is a transaction incurred in a foreign currency different from the currency the card is denominated in. In that case, the final, settled, transaction amount will be based on the exchange rate in effect on the settlement date. As that rate is generally not known at the time of authorization, for authorization purposes the banks will use an estimated amount based on the exchange rate at the time of authorization.

Also, many merchants, especially online merchants, will put through a small initial authorization--often but not always in the amount of one dollar--with no intention of settling this charge--when a new customer first signs up. This helps to establish good faith, because if the card is stolen, lost, or otherwise fraudulent, even a nominal charge would be denied. Although the nominal authorization provides no guarantee of a successful authorization of later charges when the true charges come to hand, it does appear to significantly reduce the risk for online merchants.