Your South Pacific Business Partner
|Posted on January 28, 2016 at 5:15 PM|
It's one of the main causes of shock and awe among travellers. You've just arrived at the hotel where you've booked a room and the check-in clerk asks to take an imprint of your credit card to pay for any incidental charges you might incur. This is a pre-authorisation, a pre-auth in hotel speak, and it's likely to happen even if you've paid for the full price of the room in advance.
They might also tell you that a pre-auth is not a charge and they're right, but it places a lock-down on some of your funds. Your available balance on your credit card is reduced by the amount of the pre-auth. If you've handed over a debit card it's even worse, the funds evaporate instantly from your account. The reservoir of funds that you can withdraw from an ATM or use to pay for restaurant bills or anything else takes a hit.
The pre-auth amount varies from hotel to hotel, country to country. Even hotels within the same group do not apply the same pre-auth amount but anywhere between $50-150 per night is within the ballpark. For example at the Courtyard by Marriott London Gatwick Airport hotel, the pre-authorisation figure is £50 (NZ$110.8) per night per room. Stay in a glossy six-star establishment such as the Raffles group's Le Royal Monceau in Paris and the pre-authorisation charge for a stay of just three nights and the pre-authorisation for a recent guest was €1200 (NZ$2035).
The total amount that a hotel blocks in the form of pre-auths from its guests adds up. Assume a medium-sized hotel with 250 rooms with an occupancy rate of 70 per cent. On any one day therefore 175 rooms are occupied. If the average stay is 2.5 nights and if the hotel's pre-auth is $100 per room per night, the hotel has effectively locked down guests' funds to the value of $43,750.
Apply that same metric to a major hotel group such as Marriott International, which now has 1.1 million rooms following its acquisition of Starwood, and at any one time they've put a hold on close to $200 million of their guests' money. So what is the hotel doing with all that loot? Answer: nothing. They can't because they don't actually own the funds that have been pre-authorised, they're sitting in financial limbo. Not until if and when the pre-authorisation is converted to a charge, which happens at check-out, will the funds be transferred to the hotel's bank account.
What's wrong with a pre-auth you might think? The hotel has to guard itself against the cost and inconvenience of chasing guests who incur charges and then can't or won't pay.
Note that the pre-auth comes with a sunset clause. Unless the hotel converts the pre-auth funds to a charge the pre-auth is cancelled within a specified period of time and funds are unblocked from the cardholder's account. The actual length of time a merchant can maintain a lock on funds in a pre-auth varies depending on their merchant classification code (MCC code) but five days is standard. After it expires a pre-auth can only be renewed with the consent of the cardholder.
Further, according to a Marriott spokesperson, "Credit card holds are typically released within 24 hours of checking out."
That sounds fine, but what that means is that the hotel has advised the financial institution that the pre-auth has been cancelled. Getting the cash back into your account is another matter. It can take several days after you check out for that to happen, or even longer. In its Booking Terms & Conditions, the Mantra group advises "The pre-authorised amount is set aside by the card issuer for a period of up to 14 days from the date of pre-authorisation."
The problem is not the hotel, it's the financial institution behind your credit or debit card. When the hotel has notified the financial institution to unblock the pre-auth it's in their interests to drag their feet. If that institution can delay handing back your pre-auth for a few more days it can use those funds for another purpose, and that's what it does.
There are a few lessons to take away from this. First off, use a credit card rather than a debit card for the pre-auth. When you check out, use the same card to settle your bill or it can take even longer for the funds to be restored to your account. There is some anecdotal evidence to suggest that it's better to make a charge against your pre-auth, however small. This requires the hotel to make a charge against your pre-auth and your card issuer will refund the difference, although it can also happen that the hotel will regard whatever you've charged to your room as a separate charge from the pre-auth.
Another way around this problem is to use cash for the pre-auth. When you check in, the cash should be sealed in an envelope and held until your departure, minus any amount owing. That works most of the time, although cash carries its own set of risks, and if the pre-auth is to cover the room charge as well as incidentals the amount could be substantial. The hotel might also insist on local currency, although US dollars or euros will usually get you through.