It is the case, you went to a hotel, but you were unknown the number of days you would stay. Then hoteliers (merchants) block some amount from your credit card. So it is called pre-Authorization. And Banks will approve these types of transactions with a status of hold.
Read: Here is more on Credit Cards Domain Knowledge.
After completing the authorization(sale), the blocked amount will be adjusted by the bank during settlement to the merchant. Then banks credit balance funds to the cardholder.
In a scenario, suppose a merchant cancels a pre-auth transaction, in turn, the bank will release held funds to the card holder.
A distributed ledger is a shared database that allows institutions to directly send and receive money in a trustworthy fashion without a middleman.
Here is a list of business areas where pre-authorization is possible
- Entertainment hubs
Note: Pre-auth is done, but the sale is not done. The locked funds will be released by the bank automatically after a certain time completes. Pre-authorization is also called authorization hold.
According to the 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.
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