What is POS Preauthorization for Bars and Restaurants?

If you own a bar, are looking to open a bar, or have a bar in your restaurant, you understand that there are many factors contributing to the overall success of your business.

When it comes to bar businesses, there’s a technological advancement for bar POS systems that’s becoming increasingly indispensable to providing excellent customer service: preauthorization. No, not the healthcare kind — although they do share some similarities.

Chances are when customers visit your business, they’ll likely order more than one drink. Preauthorization, also known as preauth or preauthorized transactions, works by using a customer’s card to open up a bar tab. It ensures that a customer has adequate funds on their credit card before service, and it's a convenient way to make sure each customer’s order is attributed to their card. There are many POS preauthorization systems that securely retain customers’ information — and ensure that you won’t be stuck with a customer’s bill if there are insufficient funds. 

To fully understand the importance of preauthorization for bar businesses, we will review the following below: 

• How does a bar tab work?
• What is POS preauthorization and how does it work?
• 5 ways bar businesses benefit from preauthorization
• Common preauthorization myths debunked

How does a bar tab work?

Before we discuss preauthorization, let’s backtrack and talk about bar tabs. We mentioned them briefly above, but first, for those new to the business — what is a bar tab, anyway? 

Put simply, a bar tab is a running bill that allows a customer to have all their drink orders throughout their visit on one bill, instead of paying separate bills after every drink is ordered. Bar tabs provide customers peace of mind and a convenient way to order drinks without having to retrieve their card after every transaction. Bar tabs also incentivize guests to stay longer and spend more during their visit. 

Instead of multiple bills and having to calculate gratuity each time, customers receive one itemized bill, which often means more revenue and bigger gratuity for your bar staff.

What is preauthorization and how does it work?

Credit and debit card preauthorization, or preauth, allows bartenders to:

1. Swipe a customer's credit card or debit card
2. Securely save the credit card or debit card information as their bar tab
3. Verify that the card has sufficient funds via a temporary hold

The most common question bartenders ask besides "What are you having?" is “Do you want to start a tab?” Without preauthorization, there’s a risk that the customer’s card could be invalid or unable to pay the bill they receive.

Using preauth for your bar allows you to set a minimum authorization amount to increase your chances of successful payment processing. Preauthorizing a credit card puts a hold on a customer’s funds, but the preauthorized amount is voided once the final, total charge is processed.

Like any other transaction, preauthorization does not guarantee prevention of all chargebacks.

How does preauth help my bar?

Preauthorization has the potential to streamline your operations and improve the guest experience.

Here are five ways preauth is important for your restaurant or bar business:

1) Preauth limits fraud from fake or stolen cards

In addition to the hunt for fake IDs, bars and nightclubs should also be on the lookout for fake or stolen credit cards. The consequences of a customer racking up a bill on a stolen or fraudulent credit card can be a huge financial blow.

When it comes to credit card fraud, there are significant consumer protections in place. If someone is a victim of fraud, they can rest assured that their issuing bank will not remove funds from their account. Merchants, however, do not always enjoy these same protections. This means that the restaurant at which the “hot” card was used can be left with significant losses.

With preauthorization enabled, swiping the card automatically checks that the card is valid, linked to a bank account, and isn’t fake or reported as lost or stolen to the issuer.

To learn more about restaurant fraud prevention, check out this post.

2) It prevents "insufficient funds"

The “I can’t pay my bill” conversation is awkward, embarrassing, and uncomfortable for all parties involved.

With preauthorization, however, this unpleasant scenario is avoided altogether. Preauth checks the card for a preset amount of funds – usually the average cost of a drink at your bar – which limits the chance that someone with a real card, but no funds on it, will amass a large tab at the bar’s expense.

3) Preauth increases the speed of workflow

A bartender’s job isn’t easy. Customers are often demanding and want perfectly crafted drinks delivered in a timely manner. It's critical that bar POS technology enable, not hinder, a bartender’s job.

Preauthorization helps bartenders move faster. A credit card can be preauthorized with a single swipe and no additional screen taps. This also saves the card as the customer’s bar tab, cutting down close-out times, as the bartender doesn’t have to search through a stack of cards when the bar is busy.

4) It keeps everything organized

With a single preauthorized swipe, the bartender can save the customer’s card as an open tab and hand the card back to the customer. Every time the cardholder orders another round, the bartender can add the drinks to the saved credit card on file and will not need the physical card back in order to close out the check.

Ezra Star, General Manager of high-volume bar Drink in Boston, attributes the ability to open a tab and immediately return the credit card to the guest as a key way to create a better customer experience.

"Any of the bartenders can find the tab and close it out without requiring the guest to hunt down their credit card or running the risk of us losing their card," Ezra adds. 

5) Preauthorization keeps your establishment competitive

In the same way that modern restaurant POS systems have displaced the traditional cash register as the industry’s standard operating system, bars that offer preauth will continue to outshine establishments that abide by more traditional payment processing methods. Since preauth keeps bars moving more efficiently, patrons won't have to sit around and wait for their drink, card, or receipt.

Preauthorization myths debunked

New to the concept of POS preauthorization? Let’s address some of the most common concerns below.

Myth #1: “Saving customer credit card information is dangerous and a security risk!”

All saved credit card details and data are immediately encrypted in the cloud when the card is swiped. There is no sensitive information stored on any terminal or device.

Anyone who has ever participated in online banking has already knowingly (or unknowingly) relied on the powers of encryption to keep their data safe.

Myth #2: “Customers will think they’ve been charged twice!”

The way credit card preauthorization appears in online bank statements will vary depending on the cardholder’s issuing bank.

It’s common to see what appears to be more than one charge on the account when preauthorization takes place, though only one charge for the final amount will remain after credit card batching has occurred. The authorization request holds typically disappear from the customer’s account one to two business days after the transaction.

It’s possible that consumers will be surprised, and perhaps a bit confused, by the way a preauthorization hold may resemble an additional charge on their bank statement – at least for the first few times they encounter it. However, as time goes on and preauthorization is more widely adopted across the restaurant industry, consumers will quickly come to accept this as the status quo.

Myth #3: “Preauth will complicate my day-to-day procedures!”

Preauthorization will not radically change your operation. For example, with preauth you can still:

• Take alternate forms of payment to close out a check (cash, gift card, or even a different credit card)
• Split checks upon payment
• Run sales reports
• Close out checks at end-of-day

The only real changes owners/operators will experience with adopting preauthorization are increased levels in both staff efficiency and guest satisfaction. 

Is preauthorization here to stay?

Any feature that helps give consumers more control over their experience while simultaneously making bars and restaurants more efficient should not be overlooked, and preauthorization checks both of those boxes.

While preauthorization is relatively new to the bar and restaurant landscape, it’s a secure and convenient system for both bars and consumers and allows your business to do what it does best: provide excellent customer service — and drive repeat visits!

Running a bar or restaurant is hard. Using Toast isn’t. Request a demo to see how Toast differs from other point of sale platforms and get a customized walkthrough for your unique needs.

Are you already using Toast for your bar or restaurant and want to learn more about how to implement credit card preauthorization? Check out this Toast Central article for step-by-step device setup. You can also read our Credit Card Preauthorization FAQs.

Related bar business resources

• How to Open a Bar
• The Best Bar POS Systems: 10 Must-Have Features
• Cost to Open a Bar

• How to Write a Bar Business Plan

• Essential Bar Equipment List

• Bar POS System