The truth about credit card holds

Oct 26, 2021 by Kelsey Banerjee

With nearly 70% of B2B companies happy to use and accept credit card payments, it looks a lot like this payment method is the holy grail for both AR and AP departments. After all, credit card transactions are far faster and more trackable than older payments such as checks.

But, despite all their convenience, credit cards are far from perfect. Some features end up being double-edged swords.

Let's look at credit card holds. On the surface, they appear to safeguard your pending transaction. After all, charge holds to ensure that customers don't spend your money prior to settlement. And since funds aren't released immediately, you can easily refund customers, review accounts for fraud verification, and prevent chargebacks.

However, merchants leaning too heavily into credit cards and leveraging credit card holds have to deal with another concern: transaction rejections by the card issuers and potential penalties.

Just because the customer cardholder has the money in their account does not mean the credit card company will approve the charge. At the same time, holding a transaction for too long has its own consequences.

To understand why this happens, and what alternatives are out there, we first have to do a deep dive into the types of credit card holds.

What are credit card holds?

There are two types of credit card holds. Credit card authorization holds, sometimes called pre-authorization, are a temporary hold on a customer's transaction, usually between one to second days. Administrative holds are usually placed by the issuing bank if the customer spends over their credit limit or has pending late payments.

For our purposes, we're looking at credit card authorizations specifically.

Generally, authorizations are used when the final total is unknown when the card is charged. That's why you'll commonly see this method of payment used for gas stations, hotels, rental companies, and most card-not-present (CNP) transactions. With authorization, the purchase is placed on hold until the actual purchase amount can be applied.

How long a hold lasts is related to several different factors, among them being the Merchant Category Code (MCC) and the type of transaction.  For example, CNP transactions may take up to seven days to clear, while hotels may use authorization holds for up to 31 days.

The problems with credit authorization holds

As we mentioned, holds are used primarily to reserve the transaction amount until there is a final total or to align with the sales cycle. For example, you may wait to charge a card until an item is shipped or a service is rendered. But overstepping your hold time limits can end up costing you big time.

In the best-case scenario, holding a transaction for too long means you'll need to resubmit the transaction. But in many cases, Visa, Mastercard, or another credit card issuer may hit you with a fee for hold "misuse."

Unfortunately, time limits aren't the only issue with card holds. Regularly using authorization holds can make consistent and accurate record tracking difficult. Duplicate holds can upset customers and mistakes translate into additional fines and fees. In fact, it's possible that you'll end up with more chargebacks, even if you were using holds to avoid them.

Not only can you be slammed with fees, but there's a chance the issuing bank will still decline the transaction. Approvals are not guaranteed, and it can quickly become a hassle for both the merchant and the customer to figure out what went wrong. For B2B customers, this messy situation can turn into late payments or no payments.

Finally, another issue is customer convenience. While credit cards are a popular payment method in both B2B and B2C spaces, and credit transactions have largely unseated checks, it's imperfect. Holds, while they have their uses, disrupt the payment process and cause friction for both parties.

Companies accepting credit cards and using authorization holds not only have to carefully monitor their holds, but they typically absorb the processing fees.

Alternatives to credit card holds

However, both credit cards and debit cards have competitors. With innovations from Nacha and The Clearing House, bank-to-bank real-time exchanges are rapidly becoming the norm. Low fees, nearly-instant bank account validation, and trackable payments are appealing to both merchants and their customers.

Rather than put a hold on a purchase transaction, companies can save and securely store customer payment information for future payments. For example, a hotel could keep the customer's ACH data in their digital system and pull up the additional charges when the customer checks out.

The right payments portal will even allow merchants to add a convenience fee to credit cards, which will encourage customers to use ACH or bank-to-bank payments instead. Likewise, merchants can add a "zero-fee" option for their preferred payment methods to boost certain transactions.

With digital payments such as ACH, you don't have to worry about time limits, misuse fines, or other fees. There is usually just an interchange fee and the fee for your payment portal. At the same time, you can create a seamless experience for both parties that provides complete visibility and security for every transaction.

Expand your payments strategy

Credit card holds are slowing your AR department down. With other payment options, you and your customer no longer have to worry about fees, penalties, and long wait times. To see how Paystand helps businesses streamline and accelerate their payments process, schedule a demo with us today.