More and more hotels and restaurants in the European Union are using pre-authorisations before processing transactions. What is their purpose? Are pre-authorisations charged? What happens if the pre-authorisation amount exceeds the purchase price? Below, you'll find the answers to these questions about pre-authorisations, in addition to how they work and when they are recommended for businesses.

What's in this article?

• What are pre-authorisations and how do they work?
  
• Why use pre-authorisations?
  
• What sectors use pre-authorisations?
  
• How long does a pre-authorisation last?
  
• How do you cancel a pre-authorisation?
  
• How do you set up a pre-authorisation?
  

What are pre-authorisations and how do they work?

A pre-authorisation is a system that businesses use to check the validity of a customer's bank card and the availability of funds. In practice, the service provider sets an amount that is temporarily blocked in the customer's account balance to guarantee payment for the product or service.

Note that the pre-authorisation may be an amount less than or equal to £1 (e.g. in the case of remote sales). If the purchase amount exceeds the pre-authorisation, the remaining amount will be debited later.

The pre-authorisation can also be greater than the purchase amount (e.g. to pay for tourist taxes or damage incurred during a hotel stay or car hire). The amount is held on the customer's bank balance to ensure that they have the necessary funds, but it is not debited in full at the time of the transaction.

Alternatively, the pre-authorisation amount can be equal to the price of the purchased service or product: it's up to the business to define the parameters and pre-authorisation amount. In this case, the pre-authorisation amount will be charged in full.

Note: If the customer does not have the funds to pay for the purchase, the pre-authorisation is cancelled and no amount is debited.

Why use pre-authorisations?

For businesses whose primary activity is booking services or goods, a pre-authorisation is a safeguard against no-shows and last-minute cancellations. It acts as payment protection in such cases. It also allows the business to verify the customer's financial ability to pay for purchases in advance, while ensuring that their payment card is valid.

What sectors use pre-authorisations?

Pre-authorisations are common when booking hotel rooms and restaurants, hiring cars or bikes, and purchasing airline tickets, among other things. Petrol stations also use pre-authorisations when you pay at the pump.

Also note that if you use your payment card abroad to pay in a currency other than the pound, the pre-authorisation amount may be higher than the price of your purchase to cover the exchange rate difference.

How long does a pre-authorisation last?

The pre-authorisation amount is usually held for five to seven days, but this period can be extended to 30 days (or 31 days with Stripe's extended authorisations). It often appears as "pending" in the customer's account next to the business's name. The pre-authorisation is removed once the business has completed or cancelled the transaction.

Note that the pre-authorisation has an impact on the customer's payment authorisation limit, meaning that the customer cannot spend more than the authorised limit. If the pre-authorisation causes the customer's payment limit to be exceeded, the transaction may be declined. However, the customer can increase their authorisation limit by contacting their bank.

How do you cancel a pre-authorisation?

As a customer, the easiest way to remove a pre-authorisation is to contact the business as soon as possible. Customers can ask the business to remove it, which may take several days depending on the customer's bank and payment card.

How do you set up a pre-authorisation?

To carry out a legal pre-authorisation, the business must inform the customer in advance of the cancellation policy and the amount that may be deducted if the booking is not honoured. This must be clearly stated on the business's website when booking online. If the booking is made by phone, the customer must also be informed of this policy.

Note: Customer data (payment card number, expiry date and CVC) is protected in France by the Commission Nationale de l'Informatique et des Libertés (CNIL). As such, it cannot be stored.