Ethical question about preauthorizing hotel charges

Question

I work the front desk at a hotel, and my boss has presented me with an ethical dilemma, for which I'm seeking outside input. From my perspective, he's putting some of our guests in a financial bind, and then dodging accountability for what he's done. From his perspective, he's looking out for the company and its employees, myself included.

Here's how it works. When the hotel is close to full, my boss will run pre-authorizations on the credit cards of anyone with a room reserved for that day. He'll do this late in the morning, when check-in time is 3pm. Guests arrive and believe that they've already paid for their rooms, since they see a "pending" charge in their bank statement, from the pre-auth.

That pending charge drops off, after a day or two, but meanwhile, it ties up from $100 to $200 of their available balance. Sometimes, this means that their payment card is declined for the room charges, purely because we preauthorized it. In those cases, we are effectively charging them (temporarily) double for their first night. In particular, if they don't have the cost of their entire stay available, plus a redundant first-night charge, then we can deny them the room for lack of payment.

When this happens, my boss will explain to guests that the preauthorization was run by the third-party entity that they used for booking (e.g., Hotels dot com, Expedia, Priceline, whatever). He'll tell them that they can avoid this in the future by booking directly through us (even though our rates don't always compete with those available through third parties).

I am bothered by three things here:

• 1A. Tying up one night's stay on the guest's card is unreasonable, because it can prevent them from paying for their stay at all, creating a lose-lose situation.
• 1B. Lying to guests is wrong. When we run a preauthorization, we shouldn't be saying that Priceline did it. If we're going to run pre-auths, then the correct behavior is to be accountable for our own actions.
• 1C. The guests don't see it coming, so it is an unpleasant, inconvenient surprise.

My boss' responses are, as far I can tell, as follows:

• 2A. Everyone else does it.
• 2B. If we don't run preauths, and the guests card ends up not covering the bill, then we might lose the chance to sell that room to someone who can pay, which means we're sacrificing money that will eventually pay staff, including me.
• 2C. Guests won't like the truth, so we give them an answer that they will find acceptable.
• 2D. He runs a business, and I haven't run a business of my own, so I don't understand.

I have a hard time accepting his arguments, but he asked me what I would do, if I were the one who had to run a profitable business and support my employees. I said I'd give it some thought, so here I am. What do people think. Is this policy ethical? What is the industry standard?

Answer 1

I don't know what payment processing system you are using, but if the preauthorization and the actual room charges aren't part of the same transaction, you're doing something incorrectly, and your boss needs to figure it out.

Preauthorizing for room charges is something I would expect, but I would expect the actual room charge to be "grouped" with the preauthorization so that it is only a single transaction.

This sounds like your boss doesn't understand how to use the payment processing system.

I don't know how things are, now, but when I was handling the merchant account for a non-profit I was treasurer of a while back, we could get free training from the processing bank any time we asked.

Answer 2

Wesley's answer about the correct way to operate the pre-authorizations is right, and relevant to part 1A/2A of your question. Yes, it's quite common for pre-authorizations to be used in the hotel/travel space. However I'm not sure the specific approach your hotel is using, where a pre-auth is applied and then the room is billed independently (without confirming or cancelling the pre-auth), is all that common.

But that's only one part of what you asked. To address some of the other points:

1B - Yes, lying to guests/customers is wrong/unethical. Ditto for asking/directing employees to lie to guests/customers. And while I doubt anything would actually come of it, if Priceline and other booking sites learned that they've got a bunch of unhappy customers blaming them over needlessly cancelled bookings and the disrupted/ruined trips that flow from that, all because your hotel is falsely accusing them of running pre-auths that they never ran, it could land your hotel in hot water with them.

Also if you run the pre-auth, and you know the pre-auth succeeded but the actual charge didn't, you're in a position to fix the issue for your customers instead of just cancelling their booking and trying to sell the room to someone else. But you can't do that if you've falsely told them Priceline (or whomever) did the pre-auth. Not without exposing the lie, anyways.

2B - He's likely correct about the utility of running pre-auths, in general. But not for the double-charging way he's implementing it currently. Maybe the point of that is to weed out people with less capacity to pay amounts above and beyond the pre-auth (i.e. people who can swing the first night, but can't actually cover nights 2-6 and show up anyways). However that's not really a justification.

If he wants to make a stink about how the practice is necessary to cover staff/wages, ask him to show you the income/expense/cashflow statements demonstrating this. He won't. He wouldn't be there if the margins were that thin.

2C- What guests don't like is being denied access to a room that they booked, were preauthorized for, and can pay for except for the weird way in which your hotel is running the preauths. The truth would make them more upset at your hotel (justifiably), but even with the lie they're still upset. Partly at the booking agency, but also partly at your hotel for being too lazy/ineffective/incompetent (in their eyes) to proactively resolve the issue by contacting the booking company on their behalf and clearing up the confusion with the preauth.

Guess you could heap lies upon lies, pretend to contact their booking agency, cancel the preauth your hotel put on their card, apply the charges, and then tell them you got it all sorted out. But please don't.

Really if happy customers is the goal, the best outcome is to allow them to be guests, and not send them packing for dishonest or honest reasons.

2D - Sounds like gaslighting, honestly. Only someone who runs a business can hope to understand running a business. All too common an attitude, unfortunately. It's a convenient way to end an argument without providing any actual support for your opinion.

And like I said, try asking him to share with you the underlying information he's using to base these business decisions on, so you might learn something about how to run a business. He won't. Maybe line up alternative working arrangements before asking. :)

Answer 3

Well it is obviously not a very honest practice, but perhaps that is the first lesson about private sector behaviour when bosses are not supervised by a public authority, or menaced directly by the public.

Your boss clearly isn't going to accept any argument in which ethical constraints reduce his profits.

That said, the practice does not seem completely logical even from a profit point of view.

Your boss seems to be trying to weed out those who cannot pay for their stay, but in doing so seemingly creates a number of people who cannot pay for their stay (but could have paid if it were not for your boss's actions).

You're also potentially creating hassle and conflict at the front desk, for people who may already be tired and assuming check-in will be straightforward.

Perhaps your boss's argument would be that, being full and presumably popular, he can afford a few spoiled future relationships to drive today's profits up.

But if he has such a surfeit of custom, the obvious way to drive profit would be to increase prices in the first place, rather than resorting to credit card shenanigans. But one imagines he would have considered this, and has rejected it for some reason.

Ultimately there is no decisive argument against your boss. The benefits of his behaviour accrue to him. The costs accrue to his customers, and to market confidence as a whole. The only language he would understand is when costs accrue instead of profits.

Answer 4

Is it ethical?

Clearly not. Your boss feels the need to lie about it, which is an obvious indicator that it is not above board.

From a distance it doesn't even look like a particularly savvy business move. Customers will be turned away (losing revenue) and there is a risk that payment providers might penalise the business if they are not using the system as intended.

The real question is.... is it ethical for you to participate in the practice?

You are caught in a three-pronged dilemma:

• it is unethical to lie (to customers)
• it is unethical to accept payment from an employer, and then actively work against the employers wishes (effectively this is lying to the employer)
• you need employment, both for your own needs and to serve society as a whole

You don't have a course of action which satisfies all of these, unless you can easily and immediately find another form of employment. i.e. you are in a situation where you must compromise your ethics in some form or another. I suspect most people would choose to lie to customers and justify it as not being within their control, which is a completely reasonable approach. Personally I would choose not to lie (and have given up jobs over less) but that's more about pride than ethics.

Answer 5

Wesley's answer is correct, but does not address all situations (notably the very common case of guests staying for longer than the no-show penalty).

Performing a pre-authorisation is indeed correct, and that's the whole purpose of pre-authorisations. What is not correct is keeping the pre-authorisation and making another charge (which is actually another authorisation, followed by the actual charge).

But different scenarios are possible.

• If the booking is pre-paid, there should of course not be any authorisation at this point. The room is guaranteed and already paid for, and that's it.

  • If there is a possibility of incidentals (mini-bar, room service, meals and drinks in hotel bar or restaurant, laundry/dry cleaning, phone calls, Wi-Fi charges if any...), then an authorisation for that (not the stay) is usually requested at check-in time.
  • On check-out, the charge will be made using that authorisation, which will release any additional funds.
  • If no charges were made, the authorisation should be cancelled/released.
  • If during the stay the incidentals approach or exceed the authorised amount, the guest will be invited to settle and make a new authorisation.

• In other cases, the card is used as a guarantee to keep the room if the hotel is full and guests who haven't booked arrive (those should be turned away). The amount of the guarantee is generally the cost of the first night, though sometimes it can be more.

  • Usually in such cases customers do not pay when they check in, but only when they check out, though this can vary. Again, an authorisation is necessary here to guarantee the payment (that's why in many places you have to pay right away if you pay using cash, but you can pay on check-out if you pay by card).

  • Performing a pre-auth before the guest arrives is legitimate. That's the whole point of pre-auth, and of card guarantees. Of course it's useful only if the hotel is full and has any chance of having to turn away potential guests who haven't booked (remember there's a cost associated with every authorisation, whether that results in a charge or not!).

  • If the guest stays only for one night, then either:

    • The authorisation made before check-in is kept and will be used when the guest checks out. No new authorisation, you need to use the details of the first authorisation to "complete" the transaction (usually means entering some transaction number you got when you made the authorisation request). Note however that in many cases banks do not like this: while you got an authorisation which tells you that the card exists and that there are funds on the account, you have no proof that the guest actually has the card and can use it (e.g. knows the PIN).

    • Or the pre-auth is cancelled/released, and a new one is made. This is useful if the hotel needs to make an authorisation for a larger amount to cover for possible incidentals, for instance, or to cover for the "need to check the card" case above, or for the case below.

  • If the guest stays more than one night, then only the second option is possible.

  • If the guest doesn't come at all, then the pre-auth is charged for the cost of one night.

As you see, the most common/useful scenario is:

• If the hotel is full, do a pre-auth earlier in the day (or even days earlier... Performing a pre-auth a week earlier is not uncommon in places which are consistently full -- this would give time to contact the customer and get another card in advance to keep the booking). Doing a pre-auth if the hotel is not full is useless, takes times, and costs money.

• When guest arrives, cancel that pre-auth, and perform a new one using the guests's card, for the duration of the stay, plus incidentals.

• When guest checks out, charge the card for the total amount due using the pre-auth performed at check-in.

• If guest is a no-show, charge the original pre-auth (again, using that pre-auth, not doing a new charge from scratch).

Whether you re-use the existing auth to charge it or need to cancel it, you will need a reference number you got when you made the authorisation. Details of the procedure vary.

Answer 6

I ran a Guest House for 9 years and the majority of my bookings were through Online Agents like Expedia, Agoda, Laterooms, Booking.com and in some cases AirBnB and all these agents give you the option to insist upon pre-payment of the room fee and any including meals at the time the booking is made.

I also used an online presence that acted as our agent, Free2Book and in that case, we also took payment for the contracted service at the time of the booking was made.

All these agents take an actual payment and if a booker's card was declined by the issuer, then the booking was cancelled. Attached to this were terms and conditions relating to at one point a booking was cancelled for a refund to be made e.g. 48 hours, 14 days, 7 days whatever.

This worked in my favour a few times since in my city a late cancellation might not be made up by another booking.

As a result, we had no guests embarrassed when they arrived at reception by a card being declined on their arrival and we had a 100% guarantee that the payment for the booking had been cleared weeks in advance.

In accounting terms, taking payment for the room in advance of arrival, generally after any free cancellation period has been accounted for is effectively not a pre-authorisation but an actual payment against the final balance of the guest's account of their stay and a pre-authorisation for any subsequent costs incurred at the time of arrival would only be for those sundries.

For example, Mrs Joanna Guest books a room on 1 August for a $500 night stay on the 1 October. The Establishment's T&Cs state that payment of the room is taken at the time of booking and the agent (or establishment) takes full payment of $500 on or about 1 August. The only extra payments that Mrs Guest has to pay through pre-authorisation at check-in is for sundries e.g. $100.

This method is both legitimate in terms of tax liabilities and card processing rules and ensures that NO guest arrives with an inability to pay.

Your boss is either stupid or ignorant of the processes and by taking a pre-authorisation payment only on the day of arrival will only ever lead to a loss of income or a booking for the establishment since :

1 : A card that bounces that day for $600 will also bounce for $500 and it will be too late to cancel the booking so the guest will simply walk out leaving the room empty.

2 : An angry guest will walk out and never return of their credit card has been debited (or attempted) for $500+500+100=$1100 when the total possible transaction was going to be between $500 and $600. If I were that guest, I would be complaining to both the Online Agent and my card company and putting a stinker of a review on both the Online Agent review site AND TripAdvisor. A card merchant account can be terminated for badly run procedures.

Your boss is an idiot.

If in future, he changes the payment regime with the Online Agencies and moves all of them to pre-payment-on-booking, then cleared funds for the room have already been secured weeks in advance and he need never turn any guest away and his cash flow will be improved.

So, why don't you do some research and suggest his profits and reputation will be enhanced and his business systems streamlined and simplified greatly if he ceases the on-the-day pre-authorisation and moves to a pay-on-booking basis.

You could also get him to sign up to a service like Free2Book, which is a freemium type software that handles all the direct bookings too for a tiny fee.

So, yes your boss is a chump at best or a scoundrel at worst and doing your hospitality business a great deal of economic and reputational hard. To act responsibly, come up with a better alternative (like the one I suggest works above) and ask for a pay rise for improved cash flow and less bad TripAdvisor reviews.

Incidentally, TripAdvisor reviews are vital to any hospitality business. In the 9 years I ran my guest house, I got a consistent 5/5 every year with TripAdvisor and routinely got 9.5/10 from Booking.com and NO bad debts, NO costly no-shows without payment and no bounced cheques/cards.

PS: It sounds like your boss is like Basil Fawlty at Fawlty Towers (a UK comedy series from the 1970s) - episodes on YouTube I think.