Business Tips

Why Merchants are Chasing Splitit: How Splitit uses Credit Card Authorization Holds

Last updated January 2022

We have been receiving a lot of questions about credit card authorization, so we wanted to take a moment and quickly explain how this works for our merchants and their clients. This is everything you need to know about Credit Card Authorization in 3 minutes (or less…depending on how fast you read)

What is an authorization hold?

First off, a “credit card authorization” or “hold on the card” is basically requesting the option to charge in the future, while authorization from the credit card company is pending, which helps ensure merchants get paid. Placing authorization holds for credit card transactions is a smart, safe, and easy way for merchants to protect themselves from fraud, chargebacks, and unnecessary refunds. Think hotel mini bar, damage to a rented car etc.

These days companies with a high return rate i.e. cosmetics or glasses might hold the authorization for up to 30 days before charging the card to avoid accounting overhead associated with high return.

How it works in other industries? 

Industries, like hotels, gas stations, and car rental agencies, have been using the “pre-auth” (pre-authorization) method very effectively for years.

Let’s consider how it works in a hotel.

  1. A guest checks in at the front desk using his or her credit card.
  2. The hotel puts a hold on their credit card for a set amount to cover any damages or incidentals, without actually charging their guests.
  3. When the guest checks out, they settle their account with the hotel and head on their way.
  4. Meanwhile, the hotel removes the hold on their credit limit once the debts are settled and everything has been paid in full, releasing the funds for use once more.

If the customer were to look at their credit card account, they would never actually see the hold on their statement. They would only see that their credit limit (spending limit) was reduced during their stay. Likewise, they would see their credit limit increase once the hotel removed the hold, but there would be no “hold transaction” recorded in their statement.

How Splitit uses authorization holds? 

Our transactions work on a pre-authorization (aka “pre-auth”) system. Splitit maintains a hold on a consumer’s credit card for the entire amount but charges only the current installment. It temporarily decreases their available credit limit by blocking the total amount of the purchase, until the transaction is complete. As the consumer pays each installment, the amount blocked (or held) on their credit card decreases, until the purchase is completely paid off.

This way, Splitit ensures the shopper is capable of paying the total price. A shopper is only approved to use Splitit’s installment-payment option if they have enough credit available to cover the full purchase price. Splitit pays the retailer the value of the entire sale, “less an amount to account for the time value of money they’re paying out to the retailer before all the payments are collected from the consumer.

Here is an example for a mattress costing $500 with 5 installments, on a card with a $5000 credit limit:

Installment #  Actual charge On hold Available amount for purchase To be paid that billing cycle
Payment #1 $100 $400 $4500 $100
Payment #2 $100 $300 $4600 $100
Payment #3 $100 $200 $4700 $100
Payment #4 $100 $100 $4800 $100
Payment #5 $100 $0 $4900 $100

Working with Payment Processors

Each card brand (like Visa,MasterCard, Union Pay etc.) has different rules and regulations which Splitit follows. Splitit does not need the cooperation of the bank in which the account is kept, because it works under the regulation of Visa and MasterCard, our current partners, (and hopefully American Express and Discover will soon follow). We are regarded as an authorized solution, and merchants can continue working with the existing clearer without any change.

The advantages for our merchants

Splitit has proven to increase Average Order Value (AOV) and sales, as well as decrease cart abandonment. The advantage for our merchants is that more consumers are purchasing their products when given the option of monthly interest-free payments, meaning that firms can increase their revenue by signing up to Splitit.

In addition, merchants and/or shoppers pay a lot in fees when using financing options. With Splitit’s installment payment option, their clients don’t have to go through the hassle of signing up for financing (aka credit score dependent), making their checkout process faster, easier, and with fewer costs on the merchants’ end.

Unlike most of its other competitors, Splitit does not lend money to shoppers. In putting a hold on their credit cards to ensure repayment, it is not actually a loan. If a consumer cancels their card before their payment plan is complete, payment is then collected from their issuing bank, so there is no risk to the merchant being out-of-pocket.

Some of the most common questions we get asked: 

Q1: How long can credit card authorization last?

A: Credit card authorization typically lasts between 7-30 days.

Q2: Do I need to call my credit card company to remove an authorization on my card?  

A: No, you must contact the merchant that holds the authorization and make a request with them to void the authorization. Note that they are not obligated to do so.

Q3: How does credit card authorization work with a debit card?

A:  There is no credit card authorization with a debit card. 

Q4: How does authorization work with a prepaid card or Mastercard and Visa gift cards?

A: Since there is no credit line, there is a fixed available balance- like with a debit card- that cannot go into minus. Therefore, an authorization would freeze from the actual funds, like a charge. Splitit does not accept pre-paid or gift cards. 

Q5: Can I use Splitit to secure ‘out-of-stock’, ‘coming soon products’ or ‘pre-orders’, orders?

A: Yes, Splitit can help with this type of transaction and can help simplify these orders.