a.Avoidance of chargebacks:
The biggest advantage of a pre-authorization is that a cardholder cannot dispute a transaction or issue a chargeback if the funds have not been captured. This means that online merchant account can process transactions without having to worry about fraudsters causing chargebacks if using stolen cards.
b.Avoidance of MDR fees:
Visa and MasterCard do not assess interchange fees until the point in which the credit card is fully authorized and funds debited from the cardholders account. This is a huge benefit that many merchants are not aware of.
For clarity, some credit card processors may charge discount rate fees even when a pre-authorization is performed, but if so it is arguably not a good commercial arrangement for the merchant. If your credit card processor is charging discount rate fees for pre-authorizations you should attempt to renegotiate this point with your credit card processor, or failing that, look for a payment processor that will not charge discount rate fees for pre-authorizations.
On this point, and for further clarity, a payment gateway fee should apply in the case of a pre-authorization. That is the flat rate per transaction fee of 20 or 30 cents that most online payment gateway charge. However, the discount rate (which is the percentage based fee) should not be applied until the funds from the pre-authorization are captured and fully charged to the customers card.
c.Avoiding Refunds to Reduce Costs
Some credit card processors also charge a fee for refunds. It is beyond the scope of this article to get into a commercial discussion of what fees are fair and what fees can be negotiated away, but it is worth stating that if your credit card processor charges for refunds then it is doubly important to use pre-authorizations so that you do not need to issue any refunds. (At Merchant Accounts.ca we do not charge a discount rate for refunds, only the 20 cent per transaction fee). A pre-authorized card that has not been captured does not need to be refunded, and can save merchants money.
d.Reducing Costs by Confirming Inventory
Right on the heels of avoiding refunds to reduce costs, we have to point out that credit card processor refunds are often due to the fact that a merchant gets an influx of orders and does not have enough inventory to satisfy all of the outstanding orders. By using pre-authorizations it means that you do not incur the discount rate charges for orders that cannot be shipped.
e.Improved Customer Satisfaction
Building further on the point above about satisfaction: as a consumer, it is frustrating to order something and have it not be delivered. Regardless of whether it is the merchant’s fault or not, it is still frustrating to pay for something and not get it. The fact that you haven’t billed a customers card may not totally eliminate a customers ire, but having a simple policy on your website like “all orders are pre-authorized until inventory is confirmed, your card will not be charged until your order has shipped” can go a long way towards fostering good feelings between you and your customers.