Questions around pre-authorisation, also known as deferred payments, deferred process

johnpmarshall

Hi,
I am hoping you can help me with a small query that I have, it concerns the service pre-authorisation (also known as deferred payments, deferred processing or pre-aut). I have tried querying cooperative bank (my bank) phone support on this matter, but I haven't managed to get a knowledgeable answer from them, online searching as gave little response too.

I have a rough idea how it works, as follows; Whilst using my debit card in making a purchase a temporary "ring fence" is placed on account funds, which reflect the cost of the purchase.

This request charge is initiated by the merchant, and the bank guarantees that they will honour the payment request. However the transaction is somewhat "frozen", as it awaits the merchant to manually complete the charge process. When the merchant does, the amount is then credited from the card users account.

Can you verify that my understanding of this is correct? Can someone also explain to me the technicalities of the process? For instance, when the amount is signalled initially by the merchant, is the exact amount specified or not? In other words, is the bank aware of the exact amount requested by the merchant?

I'm concerned about this, as my wife and I use a joint account, we had hoped Cooperative bank would not honour any transactions which the account had could not support in terms of funds. As it happened we both used our debit cards independently on one occasion and ran our account into an informally arranged overdraft, thus incurring the associated wrath of charges!

Is there any way (card or bank account type) that will not allow for pre-authorisations to take place? (Neither of us use or want credit cards!)
Is an account with a Visa Electron card an option as amounts are authorised
at every transaction? Is this true… or is there an account that lets you view queued pre-authorisations online or otherwise?

I look forward to your response on this, many thanks in advance for your efforts and time and your opinions on this.
Raphael

John

Mark_In_Hampshire

Your understanding is correct, however replace "pre-authorisation" with "authorisation".

There are two events: authorisation and capture.

Typically the merchant has a period of time in which to confirm the transaction using the authorisation code they received; if they do not then the authorisation falls away. Typically during that time your "available balance" is reduced by the amount of the authorisation.

To take an example - you place an order with an online merchant for goods, the amount is authorised. The merchant ships the goods and then calls for a "capture" - e.g. to capture the funds against the previously given authorisation.

If the merchant does not capture the funds in time, the authorisation is voided. If the merchant subsequently ships the goods it doesn't mean they will not get paid, since they simply request authorisation and capture together. However if your account balance had dropped such that you now don't have sufficient funds the merchant is left with a consignment ready to ship and no means of payment. For this reason it is in the merchant's interest to ship the goods quickly, and moreover most payment processors and schemes require that if the authorisation is gained up front the merchant must indeed be in a position to ship the goods within a time period e.g. they must be in stock. A merchant is not allowed to maintain a "running lock" on funds by repeatedly reauthorising.

The latter part of your post is not quite correct. If the authorisation is in place, your available balance is reduced. If you have a basic bank account with an Electron type card which requires that all transactions are authorised, and your available balance was £100, you shopped online and spent £90 and so had an available balance of only £10, then tried to spend £20 the latter transaction should be declined.

However this isn't 100% safe to rely on.

Basic bank accounts - those with Electron cards - are far less prone to being able to overdraw or breach a limit, since the "buffer zone" - the amount of unathorised overdraft the bank will let you have - is typically nil or, say, £10.

"Normal" accounts do not require authorisation of every transaction and thus it's perfectly possible to spend the £20 in the example above and go overdrawn.

You can't view authorisations, only transactions. However online banking with most banks lets you view your current and available balances and the difference between the two is caused by pending transactions and authorisations (and credits, such as cheques which haven't cleared yet)

Hope this helps - a bit long winded

johnpmarshall

Thanks Mark,
That was most helpful, thanks for putting your time into this. I'm now a bit more clearer with my understanding of the matter. You mentioned that you can't view authorisations, only transactions and that online banking with most banks lets you view your current and available balances and the difference between the two is caused by pending transactions and authorisations such as cheques etc.

This makes sense now thinking back on how those balances have been presented to me in the past. Its a real pity however, that there isn't an online banking service that makes this accounting more transparent and explicit, in other words creates an extra line/row in your statement that says amount pending payment!
John

Mark_In_Hampshire

It would indeed be handy.

The final part of this, "pre-authorisations" which would answer a few more questions like this:

When I worked for Tesco.com we used to do pre-authorisations on cards used for online grocery shopping. I think some petrol stations do this, typically with Solo cards (which is why the pump has a notice which says users with Solo cards should fill to £10, etc to prevent problems):

When you did your shopping online as a new customer: the amount is actually debited in store - the groceries went through the checkout as normal - in effect you were sending someone to do your shopping for you with your payment card. However to prevent some instances of the order being picked and bagged and the card then declined at the checkout, a token pre-authorisation of say £1 or £2 was performed. That doesn't guarantee funds for the groceries, but it checks the card is at least theoretically valid.

This process is somewhat frowned upon these days because it causes issues. Not so much in those instances, but it used to be the case that if you checked into a hotel and were going to pay by card on departure, the hotel would take it upon themselves to pre-authorise not just the pending accomodation but also some charges for phone and mini bar use. So you go on holiday with £1000, the hotel is going to cost £700 and you have £300 spending money.

You check in, then go to the shops, to find your card declined even though your available balance is £1000, isn't it? Or, maybe it's £300. Well, no. Because the hotel has reserved funds in anticipation of something that might not even happen, so they've reserved all of your £1000 (particularly - in the US and with credit cards, but principle is the same). It's not impossible for that to happen, but payment processors frown on this activity now because of the issues it causes.

Hence while "pre-authorisation" is still a valid concept, it isn't used as much these days.