The Key to Reducing Stock Risks: What is Pre-Authorization?

In the world of e-commerce, speed, security, and accurate stock management are among the key elements of success. At this point, the pre-authorization system comes into play, providing both financial security and effective stock control. Pre-authorization offers businesses significant advantages in terms of stock accuracy, operational efficiency, and customer satisfaction while also providing a robust solution to common stock management problems in e-commerce. In this article from Papel Blog, you’ll find everything from how pre-authorization works to its role in stock management and how it can help overcome e-commerce stock challenges.

 

What is pre-authorization?

Pre-authorization is the temporary blocking of a certain amount from the customer’s credit card or debit card limit during payment. The purpose of pre-authorization is to ensure security and protect both the seller and buyer against possible risks. Especially in online shopping, car rentals, or when purchasing hotel services, it not only provides security but is also crucial for stock management and customer satisfaction.

The pre-authorization process begins when the customer starts a purchase. After the customer initiates payment with a credit or debit card, the seller sends the payment request to the relevant bank via a physical or virtual point-of-sale (POS) system. The bank then verifies the card details, transaction amount, card validity, balance, and daily spending limit and assesses the risk of fraud.
If the transaction passes the bank’s controls, the pre-authorization is approved, and the transaction amount is temporarily blocked. Once the process is completed, the result is communicated to both the seller and the customer.

The blocked amount during the pre-authorization process is deducted from the customer’s available limit, preventing excessive spending. Also, if the transaction is not completed or is canceled, the blocked amount is released and returned to the customer’s account within a specific period. In this way, the pre-authorization process provides a secure shopping experience for the customer.
For sellers, pre-authorization offers payment assurance before the product or service is delivered, enabling them to manage stock more efficiently. Moreover, fraud or insufficient balance-related issues are prevented thanks to card and balance checks.

Stock management problems in e-commerce

Stock management is crucial for e-commerce businesses, and many face various challenges in this area. To protect brand reputation and ensure customer satisfaction, careful stock management is essential. Using up-to-date technologies can significantly ease the process of maintaining effective stock control in e-commerce. The main stock management problems businesses face are as follows:

Lack of real-time stock tracking

Keeping manual stock records consistently up to date is nearly impossible. Without a real-time system, tracking stock levels accurately becomes difficult. In cases where real-time tracking is not possible, out-of-stock products may be sold to customers, leading to order cancellations. These types of errors can upset customers and damage their trust in the brand.

Overstocking or understocking

If demand is not accurately forecasted, some products may accumulate in stock while others may run out. Both situations have downsides. Overstocking increases storage costs, while understocking leads to lost customers and missed sales opportunities. Therefore, it’s essential to forecast demand correctly and take precautions accordingly.

Product stocks under high demand

During peak campaign periods, unexpectedly high demand may occur. If stock levels are insufficient to meet demand, products may sell out quickly, and customers may encounter “out of stock” warnings. This results in lost sales and negatively impacts customer satisfaction. Also, if out-of-stock products are still being sold, order cancellations and return processes increase operational burdens.

Order management errors and costs

Errors such as sending the wrong item, incomplete shipments, or excess shipments can cause financial issues for e-commerce businesses and reduce customer satisfaction, ultimately damaging the brand’s reputation. Additionally, resulting return processes lead to time loss and extra logistics costs, negatively affecting the industry.

How does pre-authorization affect stock management?

Pre-authorization plays a strategic role in stock management, especially for e-commerce businesses. Temporarily blocking the customer’s payment amount for a specific period facilitates easier stock control. One of the key impacts of pre-authorization is product reservation. When the payment amount is blocked during the order, the product is deducted from stock and cannot be sold to other customers, thereby increasing the accuracy of stock data. Additionally, by offering payment assurance, pre-authorization helps prevent transactions with fraudulent or invalid cards. Since the product is not shipped without payment approval, stock losses and return processes are also minimized.

Another advantage of pre-authorization is that it increases supply chain efficiency. Obtaining payment guarantees before the product is delivered enhances trust in the supply chain and speeds up the process. This accelerates order management, helping to meet customer demands more quickly and thereby improving customer satisfaction.
Since pre-authorization also prevents the shipment of products before the payment process is completed, it simplifies the management of cancellation and return processes. Thanks to all these benefits, pre-authorization provides financial assurance for e-commerce businesses while also making their operational processes more efficient.

 

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This blog post contains general information, not legal, financial, or investment advice. The content is prepared for informational purposes only, and you are advised to seek professional advice for your specific circumstances. The expressions in this article do not carry any binding nature or responsibility and reflect only the author’s evaluation. All your decisions are your responsibility, and Papel Electronic Money and Payment Services Inc. accepts no liability for any consequences arising from them.