What is a Credit Card Hold? A Closer Look
Today, credit cards have become the preferred payment method for most Americans, thanks to their convenience and tracking capabilities. However, certain features of credit cards can have unintended adverse effects. One example of these effects is 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. However, 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.
How Long Do Credit Card Holds Last?
What is a credit card hold, and how long will it last? This is a common question business owners have when processing transactions for the first time.
While they may sound inconvenient, placing a credit card on hold is an intelligent solution to protect your company from fraud. As mentioned, the length of a temporary hold on a credit card depends on the type of transaction and the Merchant Category Code.
Usually, holding a credit card will last one to two days, but sometimes it could take longer to check and finalize a transaction. Within an eCommerce environment, the typical maximum hold length is seven days. On the other hand, recurring transactions, such as paid subscriptions, could have hold lengths as short as one day.
Merchants in industries like automotive or hospitality can take advantage of longer hold lengths of 31 calendar days due to the nature of their products and services. For example, a hotel typically releases their credit card holds a few days after their guest checks out.
As always, part of understanding the question, “What is a credit card hold?” means being aware that you can release the hold at any time. Vendors are not required to hold cards for as long as possible – nor should they.
With so many differences between vendors, knowing your maximum credit card authorization hold length is essential to avoid misuse charges. It also enables you to inform and educate your customers by being able to answer common inquiries like, “Why is my credit card payment on hold?”
How Do I Put a Hold on My Credit Cards?
Merchants must know how to use the authorization hold to protect themselves during a CNP transaction.
Select “Authorization Only” for the total transaction amount to do this. Depending on your business, you may make this your standardized transaction type.
If you have trouble understanding “What is a credit card hold?” and how to manage them, your card issuer can advise you.
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 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 who use them to resolve disputes are likely to do it again in 60 days.
Types of Credit Card Holds
When most people discuss credit hold meaning, they are referring to the authorization hold. The authorization hold confirms that the customer has the necessary money in their account to settle the transaction.
But merchants can also encounter administrative holds. So, what is a credit card hold if marked as administrative? Administrative holds can be placed into two categories:
- Over-the-Credit Limit Administrative Hold – If your customer exceeds their credit card limit, an administrative hold will be placed on their card. This hold prevents customers from using their cards until they pay their outstanding balance.
- Late-Payment Administrative Hold – What does a card hold mean when applied to late payments? These holds are not issued by merchants but by the credit card issuer when customers fall behind on their payments. Such holds can last for months until the customer begins making regular repayments.
In all cases, administrative holds will prevent the customer from using their card to complete any further transactions online and offline. If you encounter a vendor with an administrative hold on their card, the only option is to request that they use a different debit or credit card.
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. However, 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 translates 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
Managing B2B payments can be costly, increasing operating expenses and detrimental to your business's bottom line.
Paystand is committed to promoting fairness in the financial system and empowering businesses to succeed. As the leading payment solution for vendors, we provide zero-fee payment packages that can help you reduce the cost of receivables by up to 50%, directly improving your overall profitability.
Join millions of vendors that have chosen the new revolutionary payment platform that places your accounts receivable on autopilot and transforms the cash cycle into cash instantly by scheduling your free demo now.