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

What’s in this article?

• What are preauthorizations and how do they work?
  
• Why use preauthorizations?
  
• What sectors use preauthorizations?
  
• How long does a preauthorization last?
  
• How do you cancel a preauthorization?
  
• How do you set up a preauthorization?
  

What are preauthorizations and how do they work?

A preauthorization is a system 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 preauthorization may be an amount less than or equal to €1 (e.g., in the case of remote sales). If the purchase amount exceeds the preauthorization, the remaining amount will be debited later.

The preauthorization can also be greater than the purchase amount (e.g., to pay for tourist taxes or damage incurred during a hotel stay or car rental). 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 preauthorization amount can be equal to the price of the purchased service or product: it’s up to the business to define the parameters and preauthorization amount. In this case, the preauthorization amount will be charged in full.

Note: if the customer does not have the funds to pay for the purchase, the preauthorization is canceled and no amount is debited.

Why use preauthorizations?

For businesses whose primary activity is booking services or goods, a preauthorization 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 their payment card is valid.

What sectors use preauthorizations?

Preauthorizations are common when booking hotel rooms and restaurants, renting cars or bikes, and purchasing airline tickets, among other things. Gas stations also use preauthorizations when you pay at the pump.

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

How long does a preauthorization last?

The preauthorization amount is typically held for 5 to 7 days, but this period can be extended to 30 days (or 31 days with Stripe’s extended authorizations). It often appears as “pending” in the customer’s account next to the business’s name. The preauthorization is removed once the business has completed or canceled the transaction.

Note that the preauthorization has an impact on the customer’s payment authorization limit, meaning the customer cannot spend more than the authorized limit. If the preauthorization causes the customer’s payment limit to be exceeded, the transaction may be declined. However, the customer can increase their authorization limit by contacting their bank.

How do you cancel a preauthorization?

As a customer, the easiest way to remove a preauthorization 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 preauthorization?

To carry out a legal preauthorization, the business must inform the customer in advance of the cancellation policy and the amount that may be deducted if the booking is not honored. 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, expiration date, and CVC) are protected by the Commission Nationale de l’Informatique et des Libertés (CNIL). As such, they cannot be stored.