Has someone got their hands in your bank account?

When you check in at a hotel, it's common practice to hand over a card to the receptionist - who will take a swipe and ensure that if you drink everything in your mini-bar, you can't escape without paying. The industry jargon for this kind of arrangement is "pre-authorisation". What happens in practice is that the hotel ringfences a certain amount of money on your card, and then removes the ringfence when you checkout. In the interim, the ringfenced funds are not taken from your card, and no interest is charged, but these funds cannot be withdrawn from your account.

The other common place that you'll see this practice is with car hire companies, who often add an amount on to cover themselves if you don't fill up your petrol tank, or such like.

When used responsibly, most people don't have a problem with the idea of pre-authorisation. In the case of the hotel, it allows them to provide a valued extra service to their customers, without having to run up and check the mini-bar before you've walked out of the hotel. And given the sums involved are fairly small, typically tens of pounds, most people never notice the presence of the ringfence.

Free insurance for car hire companies?

But over the last few months, I've heard of a number of cases where pre-authorisations have ended up causing consumers a real headache. In one case, a ringfence of hundreds of pounds was applied to a bank account by an airline. Even after the airfare had been paid for in full, the ringfence was still lingering on the account, causing the customer to use their overdraft and end up paying fees and interest.

In another case, someone hiring a car abroad had a sum of around £1,000 ringfenced on their card. Car hire firms typically ringfence between £150 and £250 for incidental expenses - but in this case, Hertz ringfenced the entire excess on the insurance policy. In effect, Hertz bought itself a free insurance policy by ensuring that if its customer crashed the car, it would automatically be able to reclaim the insurance excess direct from the customer's credit card. In this particular instance, the impact was compounded as the customer was using a pre-paid card, which they'd loaded up with money to spend on their holiday. In the event, almost the entire balance ended up being ringfenced by the car hire company - rendering the pre-paid card useless.

The buck has to stop with the banks for any abuse of the pre-authorisation systems. Companies have to apply to their bank to be able to use pre-authorisation, and banks should ensure that once permission has been granted, the privilege is used responsibly. Companies should have it made clear to them that pre-authorisation is not a free insurance policy. The percentage of people who don't pay their bills is tiny, and banks could ensure against this kind of default very easily.

Call for clarity

Even where pre-authorisation is being used legitimately, I think retailers, hotels and car hire companies should be forced to be explicit about what they're up to and state exactly how much they are ringfencing. They should also not accept pre-authorisations on pre-paid cards or debit cards, as it's much more likely to cause problems.

In the worst cases, ringfences can sit on cards for up to a month. This might be a useful facility for a car hire company to use if it is renting out cars for periods as long as this - but my suspicion is that the system is abused, and longer ringfences than are needed are often being administered.

It's an issue we'll be keeping an eye on. And it's definitely a practice that people need to watch out for if they're heading on holiday this summer.