Pre-authorization Settlement

Pre-authorization settlement refers to the financial process where funds are transferred following a transaction that initially underwent a pre-authorization or an authorization hold. This practice is common in scenarios where the exact transaction amount cannot be immediately confirmed, such as in hotel stays, car rentals, or gas station payments.

The process begins with a pre-authorization, where an estimated amount of money is temporarily held on a customer’s payment card to ensure that sufficient funds are available to cover the final transaction cost. This authorization hold does not constitute an actual charge on the customer's account but rather a guarantee for the merchant that the funds will be available when the final amount is determined.

Once the services are rendered or the product is delivered, and the final amount is known, the pre-authorization hold is converted into an actual charge through a settlement process. During settlement, the exact amount of money is transferred from the customer’s account to the merchant’s account, effectively completing the transaction.

Pre-authorization settlement is crucial for both consumers and businesses as it ensures that transactions are processed smoothly without the need for repeated card charges and authorizations. This system also helps in managing cash flow effectively by reserving funds for pending transactions and reduces the likelihood of payment disputes by confirming fund availability before service provision.