Authorization hold (or Card Authorisation) is the practice within the banking industry of authorizing electronic transactions done with a debit card or credit card and holding this balance as unavailable either until the merchant clears the transaction (also called settlement), or the hold "falls off." In the case of debit cards, authorization holds can fall off the account (thus rendering the balance available again) anywhere from 1-5 days after the transaction date depending on the bank's policy.

For example, if a individual has a bank balance of $100 and uses a branded Visa or Mastercard debit card to make a purchase at a retail store for $30, then their available balance will immediately decrease to $70. This is because the merchant has obtained an authorization from the individual's bank by swiping my card through its credit card terminal. However, the actual balance with the bank is still $100, because the merchant hasn't actually collected the funds in question.

Confusion With Online Banking

When viewing an online banking website, authorization holds often appear in the "pending transactions" section of the balance sheet. As stated above, authorization holds only last for a fixed maximum period of time. So, if an individual made the $30 purchase listed above, and their bank only kept that authorization hold in place for 1 business day, then the individual would see the funds as a pending transaction for that first day. If the merchant failed to present the item for payment within that first day, the authorization hold would "fall off" and the funds would appear to be available again. If the merchant then presented the item for payment 2 days later, the $30 transaction would "reappear" and actually be debited from the account at that time. This causes some issues with overdraft fees, as customers who rely solely on the online (or ATM) balance may not be taking into account transactions for which the authorzation hold has fallen off. This creates a false impression of the balance, and can cause the customer to spend more than they actually have in the account.

Other Issues with Authorization Holds

Another issue that occurs on a regular basis with authorization holds is when the transaction amount changes between when the hold is placed on the account, and when the transaction is settled. This most commonly occurs in situations where the final debit amount is uncertain when the authorization is actually obtained.

For example, if an individual makes a gasoline purchase by swiping their check card or credit card at the gas pump without using their PIN number, then the pump has no way of knowing how much gas will be used. The pump typically authorizes a fixed amount (often $1.00) to verify that the card is legitimate. When the transaction is settled, it will actually post for the full value of the purchase, say $35 in this case.

Another example can be seen with a restaurant transaction. If an individual spends $40 at a meal, the server does not know how large a tip they will leave, if they choose to leave one on the card. The server may authorize a larger amount than the cost of the meal, say $50, but again the transaction will settle for the actual total including the actual tip written on the receipt.

Banking terms and equipment