Should you take pre-authorisations or deposits?

If you're unsure of the difference between pre-authorisation and deposits, you're not alone.

As a consumer and business, it’s likely you've likely encountered both in a multitude of ways. Deposits and pre-auths have been around for a long time but as a business owner, it can be confusing to know which is best for your company.

In this article, we take a closer look at the pros, cons, and key differences between the two:

1. What is a pre-authorisation?
2. What is a deposit?
3. The pros and cons of pre-authorisations
4. The pros and cons of deposits
5. Use cases for pre-authorisations and deposits

What is a pre-authorisation?

In simple terms, pre-authorisation is a temporary hold of a customer's credit card that reserves funds for a future payment.

The 'hold period' typically lasts around five working days, during which the customer cannot access these funds. However, the money is not debited from their account until the payment is finalised, at which point the funds are converted to a charge.

Credit card pre-authorisation practices are a popular form of processing payment, enabling merchants to accept payments online or in person. They are commonly used by hotels, tour operators, and car rental agencies to protect from loss, damage, or theft.

Although pre-authorisations are not the best option for every business, they are an excellent way to protect equipment or property and reduce costly chargeback and other miscellaneous transaction fees.

With Pomelo Pay, you can take pre-authorisations when making a payment request. Here’s how to get started:

1. Open the Pomelo Pay app
2. Head to “payment requests”
3. Enter the payment amount and click on “Pre-authorisation”
4. Copy the payment link or send it directly via email, SMS, Whatsapp or any other messaging platform.
5. You’ll have authorised the payment method to your customer and will be able to capture the payment later

What is a deposit?

A deposit is a sum of money paid upfront by a buyer to secure a sale before its completion.

Deposits can be refundable or non-refundable, depending on the terms of the sales agreement. If the sale is successful, the deposit is applied to the final payment amount, which is then considered a down payment.

Deposits are commonly used in real estate, letting property, and vehicle rentals. They provide an additional level of security for the seller, particularly when there is a valuable asset involved, such as a car or property. Deposits give both the seller and the buyer increased confidence in the sale.

With Pomelo Pay, you can also take deposits securely with payment requests. We’ve also made it easy to get started:

1. Open the Pomelo Pay app
2. Head to “Payment Requests”
3. Input the deposit amount you want to charge
4. Make sure the “pre-authorisation” button is unchecked
5. Copy the payment link or send via email, SMS, Whatsapp or any other messaging platform.

The pros and cons of pre-authorisations

There are several benefits of using pre-authorised payments. Here are some of the core advantages for both you and your customers:

Payment security: Put simply, pre-authorisation ensures that your customers pay you. The value of a 'hold' is that the customer cannot leave or refuse payment for the services they have used. With that in mind, this also means that additional charges, including incidentals, will be covered.

Avoid costly refund fees: With a straightforward transaction, many credit and debit card processors will charge you to refund payment. With pre-authorised payments, you can simply cancel the hold. Since no transaction has occurred, no fees will be incurred.

Prevent chargebacks: Since the funds in the cardholder's account have not yet been captured, there is no confirmed charge to dispute. Because of this, pre-authorised payment is an easy way to avoid unwanted chargebacks.

Keep customers happy: For your customers, pre-authorisation takes the stress out of cancellations. If they pay upfront for the booking, they will have to wait for the money to be refunded into their account.

Again, with pre-authorisation, no transaction has occurred, so there is no refund necessary. The hold is simply cancelled, giving the customer instant access to their funds.

So what about the cons? Despite these overwhelming benefits, there are a few things to watch out for when using pre-authorised payments.

If you fail to follow up with a pre-authorisation within its holding period of 7 days, the issuing bank will release the on-hold funds back to the customer, removing the transaction. This form of denied transaction is known as 'falling off'. When this happens, you may incur a 'misuse fee' for authorisations that have not been settled within the given time parameter.

Similarly, if you choose to extend the 'hold' for too long, customers may be inclined to move funds around, affecting your transaction or potentially denying it altogether.

Thankfully, pitfalls such as these can be avoided by ensuring you settle the authorisation well within the holding period. The length of this will depend upon your industry and the circumstances surrounding the transaction.

When issuing pre-authorisations with Pomelo Pay, the holding period is 7 days. If you make sure to follow up with the pre-authorisation within that period, you won’t have to worry about incurring a misuse fee.

The pros and cons of deposits

There are plenty of advantages to using deposits to secure business transactions. Let's take a look at some of the core benefits.

Mitigate risk: By taking a deposit, you're reducing the risk of non-payment from rogue clients. By requesting a deposit upfront, you'll also weed out the customers who don't pay, saving you time and money in the long run.

Ease your cash flow: Getting a deposit upfront means that part of the fee is in your business account for longer. As well as creating additional interest, this extra cash can be put towards resources, materials and day-to-day expenses.

Secure the sale: When a client pays a deposit for a booking or service, they are committing to a binding, often non-refundable agreement for full payment once the sale is complete. So as a business owner, you can be sure the client is fully invested in the sale from the get-go.

The disadvantage of using a deposit is that there is no sure-fire way to ensure you receive payment in full. Unlike pre-authorisation, deposits allow customers to slip away without paying, ultimately exposing you to financial loss.

The other disadvantage is that some customers may not be happy committing a deposit upfront, and might prefer working with a company that doesn’t take deposits or uses pre-authorisations instead.

Use cases for pre-authorisations and deposits

Both pre-authorisations and deposits are used across a wide range of industries, from hotels and rental agencies, to tour operators and construction companies.

In hotels, pre-authorisation enables funds to be held either at the booking stage or during check-in. As well as making the whole booking process more manageable for customers, pre-auths also guarantee that when a customer checks out, there are reserved funds available to cover any additional charges they may have incurred. These include spa visits, additional room service, or damage to the room.

Construction companies might prefer deposits, particularly those hiring out expensive pieces of equipment. The reserved funds act as a 'security deposit', protecting their business assets from loss, damage or theft. Similarly, car rental agencies may use deposits to ensure the car is returned without damage, with a full tank of fuel.

At Pomelo Pay, our customers include resorts in the Maldives and hotels like the Hyatt which use pre-authorisations and deposits regularly when managing customers.

It's clear that both pre-authorisation and deposits have significant advantages for businesses, and can help make payment flow with customers a lot easier. With Pomelo Pay, we’ve made it easy to take both types of payments using payment links.

Ready to get started? Create a Pomelo Pay account for free.

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