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When you set up an online marketplace, you must duly consider what payment methods you will offer your users (if you facilitate payment on your site). It is better to provide options that your sellers will use and methods that your buyers will have access to. You also need to ensure you supply payment options that protect both parties’ interests and offer a certain degree of security. Whether your users decide to accept payments in person or online, credit card pre-authorisation can be a valuable tool for any business. They provide security of payment for your users and a more streamlined transaction process. This article will explain what credit card pre-authorisation terms are and how they work for an online marketplace.

What is Credit Card Pre-Authorisation?

Credit card pre-authorisation refers to a process that temporarily holds funds of a particular credit card to confirm that the buyer has funds available. You may also know them as ‘pre-auth’ or ‘auth-only’ transactions.

There are two steps to the process, which you can see below.

Step 1: Pre-Authorisation

A customer begins a transaction and provides their credit card details. To confirm the customer’s credit card’s validity, a merchant can issue a temporary hold on funds on that card for a specified amount. This hold can last from a couple of hours to several days, depending on transaction completion. The seller does not charge the card, but the customer cannot access or spend this reserved money. When the seller engages in this process, the payment gateway they use will usually assign a pre-authorisation number to this transaction.

Step 2: Transaction Completion

Once the seller provides the goods or services, then they can finalise the transaction. The seller can charge the total amount to the credit card, and the buyer receives what they paid for. The final charge may differ from the reserved hold, but this depends on the transaction itself and the method you use for the pre-authorisation. 

Credit card pre-authorisation is a form of validation. It confirms that the credit card is real and that the customer’s card can pay for the goods or service they purchase through your online marketplace. If the customer decides to cancel their purchase, the seller releases the amount back to their credit card. The payment does not go through. 

Why Use Credit Card Pre-Authorisation?

Using pre-auth transactions can be helpful for your online marketplace where there is a delay between purchase and contract completion. This is why businesses in the hospitality industry will often use credit card pre-authorisation to validate in advance that their customers can pay for accommodation or their bar tab. The process means that you can:

  • validate credit card details; 
  • confirm that a user can pay from their account with their available balance;
  • hold a purchase/booking for a user; and
  • secure payment at the appropriate time for a product/service provider.

For example, Airbnb will sometimes use credit card pre-authorisation for the total cost of accommodation when a user puts in a reservation request, and the accommodation provider has not approved that request yet. Once they do approve, they release the hold and charge the total amount. If the accommodation provider does not approve the reservation request, they will cancel the hold and not charge the user.

Alternatively, if you just want to confirm the validity of a credit card, you can use a status check. This charges the relevant card for $0.00, just to ensure it is correct. This is a fast process and useful for online systems. 

Credit Card Pre-Authorisation and Your Online Marketplace

If you provide payment services on your online marketplace, it may be worth considering including credit card pre-authorisation as a part of those services. This would usually involve checking whether your preferred payment gateway allows this function or using software that supports pre-authorisation.

When there is any delay between purchase and customers receiving goods/services, your website users can benefit from having credit card pre-authorisation as an option. If you use buy now pay later services as a payment method, they will most likely use credit card pre-authorisation.

For example, you may run an online marketplace that runs on users commissioning artists for their creative works. Credit card pre-authorisation would be helpful here, as artists can confirm that their customers can pay at the beginning of the commission and charge the full amount once they have completed the piece.

If you do provide this service, be sure to outline its exact functioning in your marketplace terms and conditions. This would include:

  • how long the hold lasts for; and
  • what amount the hold charges.

Key Takeaways

Where there is a delay between a customer purchasing goods or services and receiving those things, then you should duly consider including credit card pre-authorisation for your providers. This adds an extra level of security for your sellers on your online marketplace so that they can confirm credit card validity and that their customers can pay. If you would like more information or help with the credit card pre-authorisation terms for your online marketplace, contact LegalVision’s eCommerce lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

What is an online marketplace?

An online marketplace is a website that provides a place for sellers to sell their goods or services to customers. Examples include Trade Me or Etsy.

What is credit card pre-authorisation?

Credit card pre-authorisation is a card validation process. A merchant can issue a temporary hold on a certain amount of funds on a cardholder’s account for a specific period using the customer’s credit card details. This is both to confirm the validity of the card and the cardholder’s ability to pay.

What is a payment gateway?

A payment gateway is payment processing software that allows your customers to pay using their credit or debit card online. You will have to pay a payment gateway fee to use one on your website. Examples include Windcave or Stripe. Your issuing bank can help you with choosing an appropriate payment gateway.

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