Let me tell an example, you went to a hotel but not sure how many days you will stay there. From safer side merchant block some amount from your credit or debit card. This kind of blocking is called pre Authorization.
This is a transaction to block cardholder funds for some time. Bank will give an approval for this transaction. Banks give a status of ‘hold’ to this transaction.
In my previous posts, I have added few posts on difficult Credit Cards Domain Knowledge concepts. These will help you get more knowledge.
The same merchant when completes authorization or sale, the amount will be adjusted by the bank during settlement to the merchant and cardholder balance funds will be released.
When merchant cancels pre-auth transaction, for example Void the transaction, bank will release hold funds to card-holder.
A distributed ledger is basically a shared database that allows institutions to directly send and receive money in a trustworthy fashion without a middleman. As a result, we have the capacity to connect the world’s payment systems for the first time.That’s a big deal.Chris Larsen
Best Examples for Pre Authorization Transactions
- Entertainment hubs
Pre-auth is done, but sale is not done. The locked funds will be released by bank automatically after certain time completes.
Pre authorization also called authorization hold
According to wiki, when a merchant swipes a customer’s credit card, the credit card terminal connects to the merchant’s acquirer, or credit card processor, which verifies that the customer’s account is valid and that sufficient funds are available to cover the transaction’s cost. At this step, the funds are “held” and deducted from the customer’s credit limit (or available bank balance, in the case of a debit card), but are not yet transferred to the merchant.
At the time of the merchant’s choosing, the merchant instructs the credit card machine to submit the finalized transactions to the acquirer in a “batch transfer,” which begins the settlement process, where the funds are transferred from the customers’ accounts to the merchant’s accounts.