Pre-Authorizations and Incremental Auth
Pre-authorizations and incremental authorizations are specialized authorization types used when the final transaction amount is unknown or may change.
Pre-Authorization vs Final Authorization
┌─────────────────────────────────────────────────────────────────────────────┐
│ PRE-AUTHORIZATION vs FINAL AUTHORIZATION │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ PRE-AUTHORIZATION │
│ ───────────────── │
│ • Used when final amount is unknown │
│ • Common in: Hotels, car rentals, gas pumps, restaurants │
│ • Often for an estimated or maximum amount │
│ • Creates a hold on funds │
│ │
│ Example: Hotel Pre-Auth │
│ ┌─────────────────────────────────────────────────────────────────────┐ │
│ │ Day 1: Check-in │ │
│ │ Pre-auth for $500 (3 nights × $150 + incidentals) │ │
│ │ Cardholder sees: "Pending $500" │ │
│ │ │ │
│ │ Day 3: Checkout │ │
│ │ Final bill: $425 (room + minibar) │ │
│ │ Capture $425, release $500 pre-auth │ │
│ │ Cardholder sees: "Posted $425" │ │
│ └─────────────────────────────────────────────────────────────────────┘ │
│ │
│ FINAL AUTHORIZATION │
│ ─────────────────── │
│ • Used when exact amount is known │
│ • Common in: Retail, e-commerce (after checkout) │
│ • Can be Auth + Capture combined (single message) │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
Partial and Incremental Authorizations
┌─────────────────────────────────────────────────────────────────────────────┐
│ PARTIAL AND INCREMENTAL AUTHORIZATIONS │
├──────────────────────────────────────────────────────────────── ─────────────┤
│ │
│ PARTIAL AUTHORIZATION │
│ ───────────────────── │
│ Used when cardholder has insufficient funds for full amount. │
│ │
│ Example - Gas Station: │
│ ┌─────────────────────────────────────────────────────────────────────┐ │
│ │ Pump requests $100 authorization │ │
│ │ Card only has $45 available │ │
│ │ Issuer responds: "Approved for $45" │ │
│ │ Pump dispenses up to $45 in gas │ │
│ └─────────────────────────────────────────────────────────────────────┘ │
│ │
│ Industries using partial auth: │
│ • Gas stations │
│ • Prepaid cards │
│ • Gift cards │
│ • Split-tender transactions │
│ │
│ │
│ INCREMENTAL AUTHORIZATION │
│ ───────────────────────── │
│ Extending an existing authorization when final amount increases. │
│ │
│ Example - Hotel: │
│ ┌─────────────────────────────────────────────────────────────────────┐ │
│ │ Day 1: Pre-auth $500 (3 nights estimated) │ │
│ │ Day 2: Guest extends stay - incremental auth +$150 │ │
│ │ Checkout: Final auth total $650, capture $620 │ │
│ └─────────────────────────────────────────────────────────────────────┘ │
│ │
│ Requirements: │
│ • Must reference original authorization │
│ • Must occur before original auth expires │
│ • Common in: Hospitality, car rental, restaurants (tip adjust) │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
Common Use Cases
Hotels and Lodging
Hotels use pre-authorizations extensively:
- Check-in: Pre-auth for estimated stay + incidentals buffer
- During stay: Incremental auth if guest extends stay or charges room service
- Checkout: Final capture for actual amount, release excess hold
Timing considerations:
- Initial pre-auth valid for 30-31 days (extended period for lodging)
- Final capture must occur before auth expires
- Some hotels capture nightly to avoid expiration issues
Gas Stations
Gas stations face unique challenges:
TYPICAL GAS STATION FLOW:
┌──────────────────────────────────────────────────────────────────┐
│ 1. Customer inserts card │
│ 2. Pump requests pre-auth for $125 (Visa/MC) or $150 (Discover) │
│ 3. Issuer approves full or partial amount │
│ 4. Customer pumps gas │
│ 5. Final amount captured (e.g., $45.67) │
│ 6. Pre-auth hold should drop, but timing varies by issuer │
└──────────────────────────────────────────────────────────────────┘
CUSTOMER EXPERIENCE ISSUE:
• Many customers see $125 hold for several days
• Can cause overdrafts or declined subsequent purchases
• Industry working to improve hold release timing
Best Practice for Gas Stations
Use authorization reversal (covered in next section) to immediately release the excess hold amount. This improves customer experience significantly.
Restaurants
Restaurants use a variation called tip adjustment:
RESTAURANT AUTHORIZATION FLOW:
1. Meal authorization: $50.00 (exact meal amount)
2. Customer adds tip: $10.00 (20%)
3. Final capture: $60.00 (meal + tip)
NETWORK RULES:
• Visa: Allows up to 20% tip adjustment without new auth
• Mastercard: Allows up to 20% tip adjustment
• Amounts exceeding 20% may require incremental auth
Car Rentals
Car rental companies use extended pre-authorizations:
CAR RENTAL SCENARIO:
┌──────────────────────────────────────────────────────────────────┐
│ Day 1 (Pickup): │
│ • Pre-auth for estimated rental + deposit │
│ • Amount: $500 (3 days × $150 + $50 buffer) │
│ • Valid for 30-31 days │
│ │
│ Day 3 (Return): │
│ • Customer returns with full tank: $450 actual charge │
│ • Customer returns needing fuel: Incremental auth for gas │
│ • Final capture: Actual amount incurred │
│ │
│ Possible Additional Charges: │
│ • Fuel charges │
│ • Damage discovered after return (within auth validity) │
│ • Toll charges (can be weeks later) │
└──────────────────────────────────────────────────────────────────┘
Technical Implementation Notes
Authorization Message Flags
Pre-authorizations and incremental auths use specific flags in ISO 8583 messages:
| Authorization Type | Key Fields |
|---|---|
| Pre-authorization | POS Condition Code = "06" (pre-authorization) |
| Incremental auth | References original auth code, amount adjustment |
| Partial auth | Response includes approved partial amount |
Merchant Responsibilities
Merchants using pre-authorizations must:
- Clearly communicate holds to customers
- Capture promptly to avoid expired authorizations
- Release holds when transactions are voided or amounts reduced
- Track authorization codes for incremental auths
- Monitor expiration dates to avoid late presentment fees
Platform/PayFac Considerations
Payment facilitators enabling these authorization types need to:
┌─────────────────────────────────────────────────────────────────┐
│ PLATFORM REQUIREMENTS FOR PRE-AUTH SUPPORT │
├─────────────────────────────────────────────────────────────────┤
│ │
│ 1. DATA MODELING │
│ • Track authorization state (pre-auth, incremental, final) │
│ • Link incremental auths to original authorization │
│ • Store expiration dates │
│ │
│ 2. API DESIGN │
│ • Separate endpoints for pre-auth vs final auth │
│ • Incremental auth endpoint referencing original │
│ • Authorization reversal support │
│ │
│ 3. MONITORING & ALERTS │
│ • Alert merchants to expiring authorizations │
│ • Track authorization-to-capture rates │
│ • Monitor partial auth acceptance rates │
│ │
│ 4. REPORTING │
│ • Show pending vs captured amounts │
│ • Reconcile pre-auth amounts with final captures │
│ • Track authorization adjustments │
│ │
│ 5. SUB-MERCHANT EDUCATION │
│ • When to use pre-auth vs final auth │
│ • How to handle incremental auths │
│ • Best practices for hold management │
│ │
└─────────────────────────────────────────────────────────────────┘
See Also
- Authorization Reversals - Canceling authorizations and releasing holds
- Transaction Lifecycle Overview - Core authorization concepts
- Failure Scenarios - Handling expired authorizations
References
- Visa Pre-Authorization Guidelines - Official Visa rules for pre-authorizations
- Mastercard Authorization Manual - Mastercard pre-auth and incremental auth specifications