An online marketplace facilitates the interaction between providers or sellers of goods and services and users who want to purchase those goods and services. When setting up an online marketplace, it is important to consider how users will pay to use the marketplace. Many marketplaces have payment functionality built on the site. Of those, some marketplaces will use credit card pre-authorisation. Pre-authorisation temporarily holds onto funds in the payment process. This article will discuss:

  • how pre-authorisation works;
  • how to use pre-authorisation;
  • what your terms and conditions need to cover; and
  • the benefits of pre-authorisation.

How Credit Card Pre-Authorisation Works

Some online marketplaces, for example, Gumtree, provide a meeting point for providers and users, and payment happens externally to the marketplace. Other online marketplaces facilitate the payment transaction between the parties. If your marketplace wants to facilitate payment, your marketplace will need to accept payment. One option to accept payment is through pre-authorisation. Your site may have the software to allow pre-authorisation to happen, or use a third-party payment processor or payment gateway that supports pre-authorisation.

The pre-authorisation process usually looks something like this:

  1. when a customer makes a booking request or purchase, you will gather card details;
  2. the funds are placed on hold. This is usually a specified amount, such as $50. Your payment gateway may not necessarily use the word ‘pre-authorisation’;
  3. the hold may last for several days (often five days). During this time the money is reserved and cannot be spent; and
  4. at the end of this time, one of two things can happen to the $50. Either the amount is charged to the card, and the payment is completed or the amount is released back to the user if the payment did not need to go ahead, and the payment is cancelled.

How to Use Pre-Authorisation

You can use pre-authorisation to:

  • ensure the card is valid and has the appropriate amount of credit; or
  • hold a booking for a user and to ensure that the provider gets paid at the appropriate time, such as at the start or end of the service.

Pre-authorisation is different from holding funds in escrow.

For example, Airtasker uses a type of escrow called Airtasker Pay. In this setup, once a user makes a booking:

  1. the funds are removed from the user’s account;
  2. held in an escrow account; and
  3. are either released back to the user or paid to the provider.

Pre-authorisation, on the other hand, does not remove the funds from the user’s account. There are many payment structures available for marketplace owners, and each comes with its own benefits and risks.

Using pre-authorisation is common practice in the travel and rental industries.

For example, GoGet, a car share business, takes a pre-authorisation charge of $250. This is not necessarily the payment to rent or share a car, but to ensure the validity of the card someone uses when they sign up. This amount is then returned to the user.

Pre-authorisation not only ensures a card has funds and is valid but also guarantees payments from users to providers. All three parties in a marketplace transaction will want to ensure that payment happens at the appropriate time. The appropriate time could be:

  • when booking the service;
  • on the ‘first day’ of the service; or
  • when the service is complete.

When booking, pre-authorisation also allows the provider to either accept or reject the job.

Terms and Conditions

Your Marketplace Terms and Conditions (T&Cs) is the contract between your:

  • platform;
  • buyers; and
  • providers or sellers.

If you use pre-authorisation, your T&Cs need to set out in the payment clause how this process works.

Your T&Cs need to set out:

Use of a Third Party Payment Processor If you use a third-party payment processor such as Stripe or Paypal as your payment method, your users and providers may be subject to those processors’ terms and conditions. As a result, you should prompt your users to review these terms.
Amount of money taken

 

The pre-authorisation should be for amounts that you set out on the listing when the customer makes the booking request.

Acceptance or rejection of the payment Some providers may want to review booking requests, at which point they will either accept the payment or reject it (and release the money back to the user). Other providers will allow for instant bookings and process the payment instantly so pre-authorisation is not necessary.
Timeframe The pre-authorisation will only be for a certain number of days, but it may take longer for the bank to return the money to the user.

Benefits of Pre-Authorisation

There are notable benefits to using credit card pre-authorisation in your online marketplace:

  • providers do not have to incur the cost or inconvenience of a user who does not pay;
  • it creates trust, as providers and users are confident that payment will be made at the right time;
  • avoiding certain payment fees if the pre-authorisation is rejected and payment is not made;
  • it reduces the administrative burden of cancellations and refunds; and
  • it can improve user satisfaction by making the booking and purchasing process more streamlined.

Key Takeaways

Credit card pre-authorisation is one way of facilitating the interaction between providers and users on your online marketplace. It is one of many payment structures available and can certainly bolster confidence in your platform, particularly from the perspective of providers. If you have questions about how to structure payments in your marketplace, get in touch with LegalVision’s e-commerce lawyers on 1300 544 755 or fill out the form on this page.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

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