Inside the Black Hole

In most credit and debit card transactions the card is only presented for payment once the exact purchase amount is calculated. Then an authorization request is sent to the issuer for the transaction amount, an approval or decline is issued and the transaction process follows its regular course.

But what about transactions, such as fuel sales at gas stations, where the exact purchase amount is unknown at the time the card is swiped? This is where merchants use pre-authorizations to ensure there are sufficient funds on the card to pay for the fuel.

What Is Pre-authorization

Pre-authorization is a transaction authorization request for a pre-determined amount that is sent to the issuer before the final transaction amount is known. Used mainly at unattended point-of-sale (POS) terminals at gas stations, pre-authorizations enable merchants to check the availability of funds on their customers’ cards.

The pre-authorization amount is set by the merchant and can be $50, $75, $100 or more and is displayed on some POS terminals’ screens (you should be doing that too, if you aren’t doing it already). There is a maximum pre-authorization amount that is set on an acquirer level, based on merchant category and other factors, and that could be stated in your merchant processing agreement. If not, call your acquirer and ask what it is.

How Pre-authorizations Are Processed

There are two ways of processing pre-authorization requests:

• Using an authorization message that is followed by a partial reversal once the transaction is completed. In this case, after the customer swipes her card, an authorization request is sent to the issuer for a fixed amount (this is the maximum pre-authorization amount). Then, once the purchase is finalized and when the exact sale’s amount is known, a partial reversal is issued to correct the previously authorized amount.
• Using an authorization message that is followed by the sending of the exact sale’s amount in the clearing record. In this case, once the customer swipes her card, an authorization request is sent to the issuer for the maximum pre-authorization amount. What you need to be aware of here is that your customer’s credit line is reduced by the sum of the pre-authorization request and the exact transaction amount.

So let’s say that your customer has a $2,000 credit line on her card and has used $1,700 of it. If you process a $50 pre-authorization amount and then the customer purchases $50 worth of gas, the card’s available balance will be $200 ($2,000 – $50 – $50). The pre-authorization amount typically takes no more than a couple of days to be removed.

In both cases the transaction must be cleared within seven business days.

It should be noted that authorization requests for hotel or resort transactions are different from regular pre-authorizations, even though you can see them referred to as such. For one thing, there are no pre-set pre-authorization amounts for hotel transactions. The hotel will request an authorization approval for the entire estimated transaction amount, whatever it may be. Once the customer checks out, a partial authorization reversal will be requested if the initially authorized amount exceeds the final amount or an authorization approval will be requested for the amount above the originally approved one, if that is the case.

The Takeaway

If you own a gas station, you need to make sure that you understand how pre-authorizations work. Also, you need to make sure that your maximum pre-authorization amount is set high enough, so that not to inconvenience your customers.

I’ve never had any issues getting gas for any amount here in Boston, but I do remember that, while on a cross-country trip a few years ago, I could only get up to $50 in gas at some stations. I was driving a truck so that wasn’t nearly enough. Now, that’s a sure way to chase all truck drivers away from your gas station so don’t do it.

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