Incremental Authorization in Payments: What It Is and How It Works

Marketing departments carefully design sales funnels to turn prospects into clients. In a moment, a single payment problem can derail a customer’s buying experience. While failed payments and inconvenient refunds can deter customers, it is possible to prevent them. 

With incremental authorization, you can easily charge customers when you aren’t sure what the final transaction amount will be. For example, you can add on a second night at a hotel, adjust the final EV charging price, or tack on tips to the end of the bill. Rather than have multiple transactions, you can have one clean, simple total that is finalized when the entire process is complete.

To learn more about how incremental auth works in payment processing, read on.

TL;DR

• Payment issues, like declined payments, refunds, and multiple transactions, can end up harming the customer experience and deterring additional charges.
• Incremental authorization is a payment processing technique used when the transaction’s total may change later on.
• A pre-authorization hold is placed by the merchant. It is an estimate of what the final amount will be.
• If additional products and services are needed, the transaction total can be adjusted.
• Eventually, the transaction is complete. The total is finalized and settled. Unused funds are returned to the customer.
• Car rentals, hotels, grocery orders, restaurants, and rideshares are just a few of the common industries that use incremental authorization during payment processing.
• Besides ensuring a smooth payment process, incremental auth also ensures fewer lost payments and declined transactions. Additionally, customers can avoid the inconvenience of being charged multiple times as add-on charges are processed.

Because adjustments are made to the original transaction, reconciliation and back-office tracking are cleaner.

What Is Incremental Authorization in Payment Processing?

So, what is incremental authorization? In essence, an incremental authorization is when the original or estimated purchase amount changes later. For example, a rideshare may have an initial estimated price for a customer’s trip. If there is excessive traffic or the shortest route is unexpectedly closed, this original estimate can change.

When the transaction is run, a hold is placed on the account. This hold is simply an estimate of the final charges. If the total charge is different, an additional authorized amount is added. Once the entire transaction is complete, the merchant captures the final charge. This final amount is processed by the payment gateway so that the customer’s funds end up in the merchant’s account.

How Incremental Authorization Helps Merchants Increase the Authorized Amount

Incremental authorization allows merchants to increase the transaction total, up to a set amount. When the card is authorized, the issuer determines a maximum amount that can be charged. If the final total is going to be higher than the maximum limit, then an incremental authorization is approved as long as it is within the issuer’s limits. 

Here’s how this process works in practice.

Initial Authorization: $150 for a one-night hotel stay

Customer Stays a Second Night: +$150

The Additional Night Is Approved: +$150

Updated Authorization Total: $300

Final Capture: $300

The final capture isn’t always higher than the initial authorization amount. For groceries, gas, and other purchases, the original amount is often higher than the final total. Thanks to incremental authorization, you can charge the correct amount and avoid having excessive refunds.

When Is Incremental Authorization Used? 

Incremental authorization is used in a range of different industries. 

• Hospitality and hotels
• Travel
• Transportation
• E-commerce
• EV charging 
• Bars

Basically, you’ll likely need to use incremental auth if you must authorize the transaction first and capture a different final total later on. Any industry that may need to adjust the transaction total is a good fit for this type of payment processing.

The Typical Flow for Incremental Authorization Payments

To help you understand how this process generally works, check out the following processing flow for incremental authorization payments.

1. Merchant Places an Initial Pre-Authorization Hold: First, the merchant places a hold for an estimated transaction total. The issuer approves this hold for a maximum amount.
2. Customer Adds More Items: At this stage, the customer may add more items. Alternatively, they may not need as much as they expected. For example, an item from their grocery list may have been unavailable.
3. Merchant Sends in an Incremental Authorization: Whenever the payment needs to be adjusted, an incremental authorization request is sent in by the merchant. 
4. Repeat Steps 2 and 3 as Needed: The previous steps can be repeated for extended periods of time, such as during long stays at a hotel or for an extended car rental.
5. Finalize the Amount Due: When the entire transaction is complete, the total is finalized. This is the amount that will ultimately appear on the merchant account statement.
6. Capture the Final Total: Once the transaction is finalized, it is settled with the rest of the batch.

Release Unused Amounts That Were Previously Authorized: If additional funds were authorized by the issuer and not used, they must be released.

Examples of Incremental Auth in Use

To help you understand how this technique works in payment processing, let’s look at some incremental authorization examples to see what types of industries use this payment option.

• Car Rentals: When someone rents a car, the merchant can obtain an incremental authorization so that they don’t have to worry about the payment method failing if the customer needs the car for extra days.
• Cruises: Cruises often involve many added charges for drinks, meals, shopping, and other incidentals. These are incrementally authorized by the cruise line as they are added. The total transaction amount is finalized at the end of the voyage.
• Groceries: Incremental authorization is useful for grocery pre-orders. Many foods have to be weighed, which can change the final amount. Additionally, customers frequently add more items before the order is delivered or picked up.
• Hotels: Hotels frequently use incremental auth when the customer’s charges go over the expected amount. For example, this figure can be updated if they decide to stay for extra nights, order room service, or require additional amenities.
• Restaurants: Dining establishments often have to use incremental auth when tips are added after the initial order.
• Taxis and Rideshares: There are many instances where a rideshare may need to use incremental authorization. For example, a rider may have forgotten that they were supposed to swing by and grab a friend. Rather than run an extra transaction, the merchant sends an incremental authorization request to get the amount increased.

The Benefits of Incremental Authorization

By using incremental authorization, you gain more flexibility, a smoother customer experience, and fewer failed payments. The following are some of the key advantages of using incremental authorization as a part of your payment processing.

Experience Fewer Lost Payments

Once the purchase amount grows past the original total, there’s a chance that the card will be declined. In normal circumstances, you would have to run the customer’s payment method a second time, increasing the likelihood of a declined transaction. When your payment gateway allows for incremental authorization, you don’t have to risk failed or lost payments.

Ensure Smoother Customer Experiences 

When a customer rents a hotel room for the night, they don’t want to come down to the front desk every evening to pay for additional purchases. From rideshares to hospitality, incremental authorization offers a smoother, more convenient customer experience.

Enjoy Better Handling of Variable Totals

Many industries can’t run a single amount upfront. Tips, add-on purchases, substitutions, taxes, and other costs can increase the original amount. With incremental authorization, you don’t have to annoy the customer by guessing too high or running the card a second time. Instead, you can adjust the total as you determine the amount for each variable.

Make It Easier To Incorporate Add-ons

It’s common to have add-ons during your transactions. Customers may decide to get fancier siding on a shed or an additional spa day. When this happens, an incremental adjustment allows you to incorporate the add-on into your payment flow.

Achieve a Cleaner Reconciliation Process

With incremental authorization, payment adjustments are tied to the original payment authorization. Instead of having multiple authorizations or voids, your payment flow will go from an initial authorization to an incremental adjustment and a final capture. Besides making your account statements easier to read, it also makes it simpler to match orders to settlement amounts. Additionally, it makes your back-office reconciliation significantly easier. 

Final Thoughts

Incremental authorization is an important payment tool for industries that have variable transaction totals. Rather than charge customers a high amount upfront and refund them the difference, this technique allows the total amount to be changed as needed. For example, room service charges or additional nights can be added to a hotel bill. Once the transaction total is finalized, it can be captured. Any unused funds can be released.

EV charging stations, bars, e-commerce sites, car rental companies, and many other industries need to process payments before the final transaction amount is known. Waiting to charge the customer runs the risk of declined transactions, but running a card prematurely can lead to a higher refund rate and dissatisfied clients. Incremental authorization ensures a smooth, convenient payment flow for the customer and the merchant.

With incremental auth, you can also simplify back-office operations. Each adjustment is tied to the original authorization, so reconciliation is easier. If payment-related support is needed or a statement has to be consulted, back-office staff can readily understand each transaction.

If you are interested in learning more about incremental authorization and payment gateway options, we can help. PayCompass can help you build a smoother workflow. From tokenization to pre-authorization capabilities, we can reduce payment friction. To learn more, reach out to our payment processing experts today.