Pre-Authorised Transactions

richardruff

I've seen a lot of threads on here about people getting angry at companies for using so called "Pre-Authorisations" to check the validity of credit/debit card details when registering for a product or service.

These are typically used by credit reference agencies, such as Noddle, usually to be able to quickly check that you are who you say you are. As if you have a credit card in your name that they are able to charge £1, for example to, they can be sure that you are in fact the person you say you are. Here's what it says on Noddle's website:

Your card is used to verify your identity. Don’t worry your card will NOT be charged at any time – your Noddle credit report is free for life.

If you enter invalid card details we won’t be able to match your details and provide you with access to your free credit report.

Please note: we won’t be able to verify your identity with a prepaid credit card.

Now this is correct, they don't ever ACTUALLY charge you anything, but they will "Pre-Authorise" your card which essentially will do the exact same thing as charge you, except you won't see it on your statement.

To better explain this you need to have an idea of exactly what pre-authorising is.

It's the same for all transactions you make using chip and pin in the supermarket for example, when you pay for your weekly shopping using your card and the "Approved" message appears on the pin-pad, what happened then was the merchant contacted your bank and said "Can we have £34.78 of this person's money?" - or whatever the value of the transaction may be. When the bank comes back and replied "Yes." that is a pre-authorisation. The money hasn't actually left your account, nor has it credit the merchant's, the two parties have simply negotiated an agreement for the bank to pay the merchant, within a specific timescale.

This transaction is given an expiry date - usually around 30 days, but it can vary. Before this date passes the merchant then has to ask the bank to actually make the transfer from the customer's account, to the merchant's account, and THIS is when the money ACTUALLY moves.

These transactions are called "Guaranteed Transactions" and they are they are similar to writing a cheque with a cheque guarantee card. The merchant essentially gets a promise from the bank to be paid the amount requested.

So, in order for the bank to be able to meet the obligation to pay the amount requested, it will set the money that has been pre-authorised aside, so that the customer cannot spend the money that has been pre-authorised. This is why your bank account has two balances, the first one being "Last Night's Balance" or "Ledger Balance" and the other one being "Current Cleared Balance" or "Available Balance". If you put your card in a cash machine and perform a balance enquiry, they are normally displayed in that order.

So, strictly speaking the first balance is what you ACTUALLY have in your bank account, and the second is what you have, minus any "Pre-Authorised" transactions, and is the balance you should usually refer to.

So when you have a company that says that it will "Request a pre-authorisation amount of £100" for example, it is going to ask the bank to set aside £100 for them, which you won't be able to spend, but strictly speaking, it won't leave your bank account, unless they claim for it, which they wont. But as far as the bank is concerned, they could ask for it, so they have to make it so those funds, aren't available for you to spend.

Now back to the expiry date I mentioned earlier. If the expiry date has passed (usually 30 days after the pre-authorisation has been confirmed) and the merchant still hasn't claimed the funds then the transaction will have been deemed to never have taken place, and the merchant cannot claim for these funds anymore. As a result of this, there is no longer a risk to the bank of having to pay up the funds and so your "Available Balance" will increase by the amount of the pre-authorised transaction.

This is a sneaky tactic and it's all about the technicality of how the transaction takes place, so bear this in mind whenever you hear the words "Pre-Authorisation" when applying for a product or service.

This also explains how, for example, when you buy something in a shop, the date the transaction shows on your bank statement won't reflect the date of the card transaction, but instead will reflect the date that the money ACTUALLY left your account, and credited the merchant's account.

Hope this helps you guys!

MoneySaverLog

So what's the difference between a "Offline" and a "Online" or "Full Auth" card then?

BugsyBrowne

When you type in on google offline & online debit cards it says that offline are only for swipping through the machine like the old cheques from a while back.

MoneySaverLog

Yes but how are funds actually authorised with a offline card?

BugsyBrowne

MoneySaverLog wrote: »

Yes but how are funds actually authorised with a offline card?

Haven't the foggiest.

JuicyJesus

MoneySaverLog wrote: »

Yes but how are funds actually authorised with a offline card?

They're not.

Your PIN entry/signature accepted as authority for the transaction. The transaction is then forwarded to the bank for payment through the shop's merchant acquirer as part of the standard batch for settlement. This transaction will then be paid from the account whether the funds are available or not.

This is why people with poor credit can't get offline cards - because they could use an offline card in a shop for small purchases, have these small purchases build up and then end up with a massive debt. An online, or full-auth, card ensures that all transactions are authorised by the bank.

It is still possible to have an unarranged OD arise with one, but that's a different matter altogether, as "transaction approved" DOES NOT mean "funds are available", it means "the bank is willing to pay this transaction", which is a different thing entirely. The only way to avoid getting an OD completely is to have a basic bank account, or another account that denies all overlimit transactions (or just check your balance before you make a purchase, but apparently some stupids find that too much effort these days).

MoneySaverLog

That's interesting as I thought when you pay at the pump they use offline transaction. When I check my balance online with lloyds tsb, where I have a offline card, £1 is pre-authorised at ASDA.

BugsyBrowne

MoneySaverLog wrote: »

That's interesting as I thought when you pay at the pump they use offline transaction. When I check my balance online with lloyds tsb, where I have a offline card, £1 is pre-authorised at ASDA.

I am not getting this is my lloyds & Barclay debit cards offline then and how would you tell.

innovate

MoneySaverLog wrote: »

Yes but how are funds actually authorised with a offline card?

At a guess, they work a bit like cheque guarantee cards (if you are old enough to remember them). I.e. there is a maximum amount the bank guarantees to pay the merchant, independent of the actual purchase amount. The merchant would normally have the customer's signature for the transaction, and the remittance process from the bank to the merchant probably follows some ancient processes which still survive from the pre- chip and PIN era.

I am tempted to think this 'online' and 'offline' distinction is a bit of a red herring because there's literally no mention of it on the UKCards Association website.

samwsmith1

MoneySaverLog wrote: »

That's interesting as I thought when you pay at the pump they use offline transaction. When I check my balance online with lloyds tsb, where I have a offline card, £1 is pre-authorised at ASDA.

At a guess the pay@pump transactions need offline cards because they only check the card is valid and so they need to have a guarantee that they can put the transaction through after. I'm guessing as innovate says they have a limit, for example I can only put a max of £99 in with pay@pump

savagej

Innovate, I pointed out sometime ago it was a made up terms, made up by people on this site to help people understand the difference between card types. But, in my opinion all it has done is lead to more confusion. In addition the same person who thought it up has added to the Wiki entry for Visa Debit, and it has no bearing on reality.

The off-line card if you want to use that term, is a card where the transaction will authorise when it can be proven the card is valid (not lost/stolen), by testing it with a £1 transactions. If that is successful then any amount up to the floor limit which is the amount that comes up on a petrol pump as the maximum you can spend.

The on-line type needs the full amount authorised before the transaction will go ahead. Because the petrol could cost anything up to £80 and the bank has no idea beforehand what you will spend they would rather not keep £80 blocked (pre-authorised) on your account when you spend £25 which is debited after 3 days but the pre-authorisation does not drop off for another week.
Or let you go overdrawn by £50 because you spent more than you had in your account, and keep doing this at retailers of this type.

Lastly, Maestro and Debit Mastercard work on a far more sophisticated method. They pre-authorise say £80, then not allow you to buy more petrol than that and after the transaction is finished, they have to within 20 minutes reconcile the authorisation so that the is the same as the value of the transaction and this will reflect on your available balance.