Pre-authorization of your credit card is technically a "hold" on your credit card credit line from a purchase placed there by a merchant who has initiated a charge, but not completed it. When the merchant actually completes the charge, the preauthorization amount will be replaced by an actual charge debited from your card.
A good example of the credit card pre-authorization process is when you arrive at a hotel and your credit card is swiped to ensure you're "good" for the cost of the hotel room and that the security checking process of your credit card matches whatever documents you supply. The card check actually acts as a "pre-authorization" so that the hotel can finalize the sale in the morning when you check out. For the duration of the pre-authorisation, your credit limit will be lowered by the amount of the "hold" on your card. After a certain number of days, the hold will lapse unless the charge is confirmed by the merchant.
Sometimes merchant's will make use of this "pre-authorization" period to avoid processing orders that are suspicious or are likely to be immediately refunded. In the past I used an account at a third party processor where orders were captured on a preauthorization basis. It was down to me to capture the orders within 72 hours or lost the sale. I was able to screen the sales and prevent the capturing of sales that were obviously fraudulent. Also, any sales that were refunded immediately I simply didn't complete the order for and eventually the pre-authorization lapsed. The advantage to the merchant in using this system of pre-authorization screening is that they can avoid processing fraudulent orders and thereby avoid losing the processing fees of that sale and a chargeback fee should any chargeback arise from the fraudulent order. Furthermore, there's a limit to the number of chargebacks a merchant can receive in any given month, usually expressed as a percentage of total sales. By avoiding as many chargebacks as possible, the merchant ensures the safety of their merchant account.
Sometimes this pre-authentication or pre-authorization system can be confusing to customers. In the past I've said to customer's who have asked for a refund that no refund is necessary, I'll just let the pre-authorization lapse. The customer then goes away happy until they discover the pre-authorization amount on their credit card (by calling their card issuer). Then they come back to me saying that I did "charge" their credit card and I had better issue a refund! Needless to say, the pre-authorisation soon expires as I said it would, and the customer relaxes.
