Preauthorization Fees Explained (For Credit Card Processing)

If you’re reviewing your credit card processing statements, you might see a preauthorization fee on there and wonder what it’s for. Certain types of businesses will have tons of these, while others may only have one or two.

Regardless of what brought you here, I’ll explain everything you need to know about pre-authorization fees in this guide—including what they are, how they work  and the specific rates you’ll pay each time you initiate one. 

What is a Pre Authorization Fee?

Preauthorization fees are charged each time a temporary hold is put on a credit card for a specific amount. When a business runs a preauthorization on a customer’s card, they’re just checking that the card is valid and has sufficient funds to cover a future sale. 

It’s common for pre-authorizations to be used in scenarios where the final amount of the transaction is unknown, like filling a gas tank or opening a restaurant tab. They can also be used to hold funds that will be charged at a later time, like reserving a hotel room or rental car. 

How to Preauthorizations Work on Credit Cards

The preauthorization process starts when a merchant requests information from the issuing bank (the cardholder’s bank). This request accomplishes a few things:

• Validates the card is active
• Verifies that the cardholder has sufficient funds to cover the transaction cost
• Puts a temporary hold on for a specific amount against the cardholder’s available funds

No transaction is taking place during the preauthorization process. The merchant is just making sure that the customer can actually pay for particular goods or services. 

For example, gas stations might run a $200 pre-authorization for pay-at-the-pump transactions. The final transaction amount here is unknown, but $200 is typically more than enough to cover a full tank. This preauthorization prevents someone from swiping a card and filling their tank, only for the gas station to find out that the card is expired or has the limit maxed out. 

Examples of Pre-Authorization Fees

Card networks charge a small fee each time a pre-authorization request is made. Even though they’re not actually processing a payment just yet, they’re still providing a service.

In some instances, additional fees might be charged if pre authorizations aren’t settled in the appropriate amount of time or if they’re used incorrectly. 

For example, there are several Mastercard network assessments associated with preauthorization fees:

• MC US Preauthorization Fee CP — Charged at 0.0075% of the pre-authorization amount for card-present requests
• MC US Preauthorization Fee CNP — Charged at 0.0125% of the pre-authorization amount for card-not-present requests
• MC Optimizer Insufficient Fund Fee — Flat charge of $0.02 if the preauthorization request request returns an insufficient funds decline code
• MC Pre-Authorization Integrity Fee — $0.045 fee charged if the pre-authorization hasn’t been cleared or reversed within 30 days of the authorization date

Mastercard charges a $0.01 minimum on both the card-present and card-not-present pre authorization requests. 

Visa also has a few different pre-authorization fees, some of which are connected to optional services:

• Visa Zero Floor Limit Fee — $0.20 fee if a settled transaction can’t be linked to an authorization
• Visa Misuse of Authorization Fee — $0.09 for authorizations that can’t be matched to a settled transaction
• Visa Account Name Inquiry (ANI) Fee — $0.10 per authorization that checks the cardholder’s name against the name on file

American Express just announced a new variable authentication feature, which allows merchants and processors to increase or decrease the amount authorized before a transaction is submitted. 

Types of Transactions That Require Preauthorization

Many businesses don’t need to obtain pre-authorization to process a payment. This is almost exclusively reserved for a couple of distinct scenarios—either the final transaction amount is unknown, or the transaction will take place in the future (or both).

Examples of transactions that require preauthorization include:

• Hotels and lodging services often require a preauthorization to cover incidentals or damages
• Car rental services rely on preauthorizations for reservations, deposits, damages, gas, tolls, late returns, and other unknown charges
• Restaurants may pre-authorize cards used to open a tab to ensure the patron can pay their bill prior to serving food or drinks
• Gas stations pre-authorize pay-at-the-pump transactions to ensure the cardholder has sufficient funds 
• Subscription services may authorize a card during a free trial period to ensure the customer can be charged the monthly or annual amount once the trial ends

It’s not as common, but sometimes retailers will pre-authorize a card. This really only applies to high-ticket items—like a sauna or commercial tanning bed.

Pre-Authorization vs. Authorization on Credit Card Transactions

While preauthoirzations and authorizations may sound similar, they serve very different purposes in the world of credit card processing. 

The biggest difference is that pre-authorizations are temporary holds that are used to verify funds without any money exchanging hands, while authorizations are used for specific transactions. Every credit card transaction requires authorization, but pre-authorizations are only needed in certain scenarios—like when the final transaction amount is unknown or the actual purchase will take place at a later time. 

We have a separate guide that explains how credit card authorization works, which you can reference for additional information.