The Truth about Credit Card Holds
With 90% of Americans owning at least one credit card, there's no doubt why they're AR departments’ preferred payment method. Their rapid processing time and enhanced tracking capabilities make them easier to process. But some credit card features can cause more harm than good. An excellent example of this is credit card holds.
Yes, card holds are a helpful tool to protect businesses and customers alike. Organizations can provide refunds by withholding funds, verifying accounts to prevent fraud, and guarding against chargebacks. This ensures each transaction is secure before release. But holds can lead to transaction rejections by the issuer and potential penalties.
Let’s dive into this subject to understand credit card holds, their consequences, and our alternatives as a business.
What are Credit Card Holds?
Authorization holds are temporary holds on a customer's transaction. They usually last between one to two days. The issuing bank places an administrative hold if the customer spends over their credit limit or has pending payments.
This is a standard method for most card-not-present (CNP) transactions. They're used when the final charged total is unknown. The purchase is placed on hold when authorized until the actual amount can be applied.
A hold duration relates to different factors, and they can go from minutes up to 30 days. Merchant Category Codes (MCC) and transaction types play a large part in the hold timeline. While CNP transactions can take up to seven days to clear, hotels may use authorization holds for up to 31 days. Credit card issuers and payment processors can affect hold length, too. For example, Visa won't allow a hold longer than 30 days.
Why do Merchants Use Credit Card Authorization Holds?
This is a daily issue for consumers. Many businesses use pre-authorization holds to ensure customers have funds on their cards. Have you ever wondered why this is a widespread practice in various industries?
Merchants use holds as a way to prevent chargebacks and potential fraud. Since holds are used when the final amount is unknown, they protect businesses against potential losses by verifying that they have enough funds.
Due to the growth of customer chargebacks and fraud in recent years, this is a preventive measure. Merchants lose $3.75 for every $1 in chargebacks, and 40% of customers that use them to resolve disputes are likely to do it again in 60 days.
The Main Problems of Credit Card Holds
The primary use of holds is to reserve the transaction amount until there is a final total or it aligns with the sales cycle. Holding a transaction for too long means you'll need to resubmit it. But credit card issuers often charge you a hold "misuse" fee, and customers can issue a chargeback based on it.
What counts as authorization misuse?
- Holding an amount for too long
- Exceeding the hold amount
- Violating the card network's rules
- Refusing to settle transactions
Duplicated or Declined Transactions
Holds can make record tracking difficult, and approvals are not always guaranteed. This can lead to duplicate holds, which upsets customers and translate into fines and fees.
There's also a chance the issuing bank will decline the transaction. This becomes a hassle for merchants and customers to determine what went wrong. For B2B customers, this messy situation can turn into late payments or no payments.
You may have more chargebacks, even if you use holds to avoid them.
Credit card payments are popular, but holds disrupt the process. Authorization holds need careful monitoring, and companies must absorb the processing fees.
A temporary hold results in more work and fewer gains. This is why businesses seek alternatives to prevent chargebacks, fraud, and payment friction.
Alternatives to Credit Card Holds
Innovation, like bank-to-bank real-time exchanges, is becoming the norm. Low fees, instant bank account validation, trackable payments, and high-security measures appeal to merchants and customers.
Nowadays, payment gateways have security measures to protect payment and card information. Rather than putting a hold on transactions, we can digitally store information for future payments. Businesses can keep the customer's ACH data in their system and add extra charges if needed.
For example, Paystand uses tokenization to streamline payments and protect sensitive data. Customers' sensitive information isn't stored but turned into a token used to make a payment. They then authorize payments without adding their preferred method every time.
Some payment portals allow merchants to add a convenience fee to credit cards. This encourages customers to use ACH or bank-to-bank payments instead. Now merchants can add a zero-fee option for their payment methods, leading customers to more secure transactions.
With digital payments such as ACH and bank-to-bank transfers, you don't have to worry about time limits, misuse fines, or other fees. You create a seamless experience, providing complete visibility and security for every transaction and mitigating other risks, such as fraud or chargebacks.
Expand Your Payments Strategy with Paystand
If credit card holds slow down your AR department, it’s time to consider other payment options. Stop worrying about fees, penalties, and long waiting times. Book a demo with us today and see how Paystand can help your business streamline and accelerate its payments process.