As part of the Merchant Class Action Litigation Settlement, Visa and MasterCard will make changes to their merchant acceptance practices.

Visa and MasterCard will change their rules effective January 27, 2013 pertaining to the surcharging of credit transactions at the point of sale. Please review the detailed communications on surcharging in their entirety at www.mastercardmerchant.com and www.visa.com/merchantsurcharging.

In summary, and subject to any limitations identified on the above websites or in the upcoming rules changes, U.S. merchants may surcharge Visa and MasterCard credit card transactions (not debit or pre-paid card transactions) at the brand level or the product level, but not both, with the following conditions: (1) surcharges cannot exceed certain levels (generally the gross merchant discount rate also known as myrealrate); (2) merchants that accept cards of other payment network brands (i.e., American Express, Discover) are subject to competitive “level playing field” limitations; and (3) merchants must satisfy notification and disclosure requirements to both the payment card network and the merchant’s acquirer at least 30 days prior to surcharging. In addition, a U.S. merchant that surcharges must provide clear disclosure to the merchant’s customers at the point of interaction.

For additional information including a list of the states that prohibit surcharging, please visit: http://blog.vantagecard.com/post/Payment-Card-Usage-Surcharges.aspx.

In the proposed settlement of the Payment Card Interchange Fee and Merchant Discount Antitrust Litigation case, merchants would win the ability to impose surcharges on customers who use card payments.

However, according to analysis of the proposed settlement, the ability to surcharge customers includes numerous restrictions and requirements:

• The surcharge amount will be limited by a cap established by Visa and MasterCard and by card type (debit card surcharge allowances to differ from credit card surcharge allowances)
• Merchants will be required to notify Visa and MasterCard before surcharging begins.
• Merchants post signs notifying customers that they surcharge
• Merchants must include the surcharge amount of any fee on receipts
• Merchants are not allowing a surcharge on Visa and MasterCard cardholders greater than charges to customers paying with American Express or Discover cards. For practical purposes, since AmEx prohibits surcharging, merchants would be forced to drop this payment choice.

Of course these surcharge rules will not apply in the 10 states that prohibit that practice by state law to protect consumers. The states that prohibit surcharging for credit cards include California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas. If more merchants implement payment type surcharges at the point of sale, we can expect consumer advocacy groups to push for even more state regulations to prevent what they will frame as gouging consumers with fees.

Then there is the question of how payment surcharge fees will hurt sales. It is argued that surcharging can cause consumers to think twice about their purchase at the checkout counter, reduces the amount of goods and services consumers will buy and lowers the average sale transaction. In highly competitive consumer markets, customers are expected to respond negatively to payment surcharges. Therefore, surcharge fees are expected to be market-driven and seen in environments where consumers have little choice but to pay them.

Merchants have long been able to offer a cash discount, pricing as an additional reward for cash carrying customers, rather than a penalty for those paying with plastic. And recent industry changes already allow merchants greater flexibility to steer their customer's payment choice.

• MasterCard and Visa Settled with Department of Justice to allow merchants more options to steer consumer payment choices
• Merchants also won Card Acceptance changes under the Dodd-Frank Act

Instead of surcharge fees, today’s best practice for implementing payment steering policies include offering a discount or benefit to encourage your preferred payment method, offer a promotion after the transaction is completed (like a credit on the billing statement or rebate) or use a separate coupon or voucher.

As we head into the start of a new year, now is a good time to review your card processing procedures. Many of the highest Interchange rates result from transactions that downgrade for preventable reasons. Please take a moment to review your card acceptance procedures and follow best practices as they are important in qualifying your transactions at the very lowest Interchange rates available.

Here are the most common issues:

• If you are accepting key entered transactions, the most common cause of downgrades is due to missing AVS (address verification service) which looks to match the cardholder’s zip code at the time of authorization. Best practice: always enter the zip code. Check with your staff and your system to make sure you are entering and passing the zip code with each non-swiped card transaction.
• Other reasons for transactions to downgrade to higher Interchange rates include a mismatch of Authorization and Settlement dollar amounts (except in certain industries where tips are allowed) and forced/offline transactions in which a previously obtained authorization code is key-entered to settle a transaction. Transactions also fail to qualify for the best Interchange rates when transactions are not settled in a timely manner (typically 1-3 days depending on your industry). Best practice: settle your batch every day and avoid obtaining pre-authorizations.
• Non travel and entertainment merchants accepting commercial cards (Business, Corporate, Purchasing cards) should upgrade to a Level 3 payment gateway or virtual terminal. Level 3 refers to passing line item detail of the invoice with the standard payment data. Best practice: don’t use a retail terminal to process commercial cards. Vantage specializes in B2B transaction processing. Please contact us with any questions and visit http://vantageb2b.com for more information.

For personal assistance, give us a call at 800-397-2380 for a free consultation.

Email “phishing” scams utilize fraudulent emails that appear to originate from legitimate financial institutions, transaction processors or other business entities that routinely conduct business with merchants.

Please review the following indicators and be on guard for scams:

• Look closely at the sender’s email address – the “from” line in these fraudulent emails usually very closely resembles a legitimate address. Close inspection may reveal unusual characters or structure that may help confirm that the email is fraudulent.
• Check email images and graphics – often images and graphics in these fraudulent emails are out of place or incorrect. This results when a fraudulent message attempts to reference an image from a legitimate entity’s website.
• Pay attention to message format and context – message length, grammar, word choice and sentence structure play a part in the success of a phishing email. Merchants should be aware that emails arriving with errors or in different languages should be validated prior to responding.
• Pay attention to message tone – if an email demands your attention or a certain action and indicates that there will be consequences if response is not made, contact your service provider to validate the information before responding. Harsh tactics may be a sign that the request is fraudulent.
• Consider whether the message seems out of character – if you have never received a request of a similar nature, the email may be fraudulent.
• Be wary of embedded hyperlinks – hyperlinks in emails from unfamiliar sources should not be utilized. To determine if the link is valid, a new browser should be opened and the address provided should by typed in as opposed to being copied and pasted it. In many instances, when typed in, the address will prove invalid.

Does your business have policies in place for each of payment method you accept? Payment policies are critical in protecting the financial health of a business. Small businesses without payment acceptance policies are vulnerable to fraud.

We strongly advise that the best practice before accepting any form of payment is to know your customer.  Be mindful, watch for any red flags and take action to delay delivery until you gain a comfort level with the validity of your customer and their payment method.

It is especially important for merchants to understand that card payments are a convenience form of payment, not a guaranteed form of payment. Since the rules and regulations are written in favor of the cardholder, merchants must be diligent in protecting their business against fraud and disputes.

Each year millions of dollars are lost on fraudulent card use. To protect your business from chargebacks and fraud, best practices include...

• Cards accepted face to face (electronically read, receiving an approval code and cardholder signature) are the safest card acceptance method. Always obtain a manual imprint of the card on a sales draft whenever you cannot swipe the card. A disputed charge is more likely to result in a chargeback loss if you cannot provide proof that the card was present and you were able to compare signatures. Also consider using security functions such as entering the “last four digits” of the card on swiped-card transactions and match the address verification value and the card verification code (CVV2) to help identify use of counterfeit cards.
• For card not present transactions, implement AVS (address verification service) to verify the billing address, not the shipping address. Check CVV2 codes to make sure your customers have their cards in their possession. CVV2 no match transactions are 5 times more risky. The best practice is to ship to the cardholder address that matches a positive AVS response and get your customers to sign for receipt. Be suspicious of customers requesting that merchandise be sent to another state or country that is not their billing address.
• Consider implementing Verified by Visa and MasterCard SecureCode. Verified by Visa and MasterCard SecureCode are payment initiatives designed to reduce the risk of unauthorized use of a cardholder account by authenticating the cardholder attempting to make a purchase online. Authentication makes Internet shopping better and safer for both buyers and sellers on the web by reducing the merchant's exposure to fraud and frivolous disputes, while protecting the cardholder from fraudulent use of their credit card. Implementing Verified by Visa shifts liability away from the merchant and on to the card issuer in specific cases.
• Use caution when processing International Orders. Fraudulent transactions that originate overseas are on the rise. International transactions have an 8 times higher fraud rate. Properly identify the person with whom you are dealing. Take a second look at what is being ordered and where it is being shipped. Did your customer offer you multiple cards as payment? Is the customer asking for immediate shipment? Does the transaction make sense? If not, you may have just detected a fraudulent transaction and saved yourself from taking a loss. There is a tremendous amount of fraud with international transactions, and it is virtually impossible to win the chargeback case. Banks outside the U.S. may not support additional security features like AVS, CVV2, and Verified by Visa.
• Do not split a transaction. If a sale on a card for $1,000 is declined, it means the cardholder does not have the available credit. Do NOT charge the card $250 four times to get the sale to go through. The cardholder’s bank will most likely charge this back to you, and you will lose.
• Do not factor transactions. This means that you do not run transactions for another business through your credit card terminal. This will not only cause chargebacks (customers won’t recognize your business name on their statement) but MC/Visa will promptly relinquish your right to accept credit cards if you are caught doing this.
• Use Code 10 calls to your voice authorization center when you are suspicious about accepting a credit card. The phrase "Code 10 authorization" is used to avoid alerting the customer to the fact that you are suspicious of their attempted transaction. The operator then asks the merchant a series of YES or NO questions to find out whether the merchant is suspicious of the card or the cardholder.
• Be suspicious of customers wanting to use numerous cards, especially when the cards all have the same first six digits. This means that all of the cards were issued by the same bank. The “customer” has most likely obtained a list of cards from that bank and they are fishing to see which ones will get approved. Remember, it is not uncommon for a person to have multiple credit cards – each from a different bank – but it makes no sense that a person would have numerous credit card accounts with the same bank.
• Be cautious on phone orders coming from a person using a special phone system designed to assist the hearing impaired and complete thorough due diligence to verify that the transaction is legitimate. Unfortunately this system is abused to commit fraud and merchant’s sympathy may cloud judgment.
• Have your customers type their Initials as evidence that they have read and agree to your return policies. However, note that if you maintain a limited refund policy such as "No refunds / All Sales Final" the product or services is still expected to work as advertised and be what was ordered otherwise merchants may still face "Not as Described" chargebacks.
• Be cautious of first-time orders with large quantity and overnight delivery request. If you are dealing with a new customer, especially one who is placing a large order, take a few extra steps to try to verify the legitimacy of the person or business. For example, check to see if they are listed in the phone book using a service like www.whitepages.com that offers a “Reverse Search” that allows you to enter a phone number or address to see if that person or business is listed.
• When taking cardholder information, ask for card type not just card number. Fraudulent use may result in someone with a card number, not the card and who doesn't know the type of card they have.
• Watch for repeat orders in a short period of time. Fraud transactions will send a trial balloon transaction and if accepted will use this card to move in for the kill.
• Watch free email accounts. They are commonly used by those who wish to hide their identity. Be suspicious of customers who will only communicate with you via email. Take a minute to contact the customer on the phone and verify the order. This is not a guarantee that the person is not trying to commit fraud but a lot of times perpetrators will not give a merchant a valid phone number to reach them.

Bottom line: establish payment acceptance policies and if you not comfortable accepting a card payment, ask for another form of payment or pass on the sale altogether. Better safe than sorry when it comes to high risk sales.

A common problem in F&B industry is dealing with payment card issues related to running tabs and adjusting tips. Recent developments require F&B establishments (F&B) to evaluate their current procedures.

New Fees
Two new card company fees (effective October 2009) to consider:

• Misuse of Authorization System fee -- a merchant obtains an approval code and doesn't use it. Visa will assess a $0.045 per occurrence.  
• Zero Floor Limit Fee -- a merchant settles a transaction without a valid approval code (invents an approval code, approval code typo), Visa will assess a $0.10 per occurrence.

With these new fees, F&B will need to research how their POS systems operate and how their merchant provider bills. Issues to be addressed include any pre-authorization strategies, obtaining multiple authorizations per tab (i.e. as the tab increases), and how “forced” approval codes can be entered and who has administrative privileges to force authorize a sale transaction. In each of these instances, starting in October, these practices can become very expensive.

The Misuse of Authorization System fee only refers to authorizations that do not have corresponding settled transactions.  If your POS requests multiple authorizations during the process of running a tab but ultimately only uses one of those authorizations at settlement, then you will have stranded authorizations that will never be used. Visa implemented this penalty fee to reduce the occurrence of "ghost authorizations" (authorizations that are approved but never cleared), as these can adversely impact a cardholder's open-to-buy, leading to increased declines and confusion at the point of sale. Also, if your POS freely allows your staff to key-enter forced approval codes, then you risk not only the Zero Floor Limit penalty, but more importantly, exposure to chargeback risk.

Gift Cards
Another development that requires F&B policy review is due to the increasing use of gift and other prepaid cards. Accepting Visa/MasterCard branded gift cards impact F&B tabs and tip policies, requiring unique processing procedures and staff training.

Because gift cards are not registered to a card holder and are treated as cash if lost or stolen, the finite balance presents challenges for otherwise routine functions like adjusting for tip. For example, F&B is unique in that the industry is allowed to submit transactions for settlement where the authorization amount is different than the final settlement amount (i.e. the added tip). For example, the card holder presents their payment card for the bill of $50. The server runs a $50 charge on the POS and (if approved by the issuing bank) returns the sales draft with tip line to the card holder. If the card holder leaves a tip greater than 20% ($10), any amount over $60 the restaurant is potentially liable for in a chargeback dispute. By card-company rules, restaurants are protected up to 20% of the original authorization for the tip amount (risk over 20% lies with the F&B establishment). Another potential issue is that the card holder knows that they have $50 on their gift card but they issuing bank returns a decline (issuer is automatically authorizing the charge in anticipation of the tip amount). To solve these issues, the card companies have implemented features for partial authorization. Your POS may return a message that the card has only been authorized for $50, alerting you to collect any remaining balance with another form of payment.

Approval Codes
Many establishments have learned the hard way that an approval code alone does not guarantee payment. To protect yourself against disputes/chargebacks, here's what you need:

• Card present with proof (mag-stripe swipe or card imprint)
• Card holder signature (should match both the name on the card and signature panel)
• A valid approval code
• Timely transaction settlement

Common Tab & Tip Issues
We often hear from restaurants, bars and nightclubs experiencing losses from open/close tab transactions. In most cases these are due to chargebacks from fraud schemes, missing signatures, or lack of a valid approval code on the charge. Excessive tips often lead to problems.

The most common scenarios include:

• Card holder walks with the receipt (F&B has no proof of signature / no authorization)
• Card holder fails to sign the receipt (F&B has no proof of signature / no authorization)
• Card holder signs receipt with an X or a line (later claims it is not their signature ( not authorized)
• Card doesn't swipe, the card number is key entered and no manual imprint was obtained (F&B has no proof the card was present)
• A server/manager makes up an approval code using the “force authorization” function, typically due to receiving an initial call center response or decline code (no authorization)
• Card holder leaves excessive tip (ex. Original authorized sale is $50; then leaves a $50 tip (100% gratuity). In these cases the card issuing bank can dispute the charge as not authorized. Servers may also be incentivized by a large tip to not follow best practices (thus falling victim to the scam / fraudulent transaction activity).

Tab & Tip Best Practices
Here are a few best practices tips. Use any or all of these suggestions as your situation may require.

• Consider pay as you go, treating cards like you would cash.
• If opening a tab, hold the drivers license until the tab is closed and you verify signature on the receipt with the signature on the back of the card. In high volume establishments, holding the license prevents multiple tabs from being opened with different bartenders or bar stations. Holding the license with an open tab is often the fastest method. And while card holders may report their card lost or stolen to abandon a tab, they are less likely to leave their drivers license behind. Plus you have more to go on to pursue those who walk.
• Make sure you have a signed sales receipt. Failure to obtain a signature results in exposure to chargebacks for missing signature / transaction not authorized. If a card holder leaves without closing their tab (leaving their license behind), be sure to attach the sales receipt for signature when they return to collect their collateral.
• Do not key enter card numbers unless you make it a strict policy to obtain a manual imprint of the card. Fraudulent cards often have fake mag-stripes or purposely damaged mag-stripes that cannot be read. Without transmitting the card's mag-stripe data, you have no way of proving the card was present at the time of sale (other than by a physical imprint of the card).
• Set policies for monitoring risk associated with tips that exceed your 20% variance authorization protections. F&B is responsible for excessive tips.
• Set policies and restrictions on “forced” authorization functions to prevent invalid (made up or typo) approvals from being submitted.
• Do not use terminal and POS applications that pre-authorize open tabs and store the card numbers and authorization number until you close out the tab.  Visa does not permit estimate authorizations for restaurants. Pre-authorizing tabs result in additional considerations like: at what dollar amount do you open the tab, what happens when this amount is exceeded, what happens if the customer decided to pay cash, what happens if the final bill is lower than the initial tab authorization, etc. There are also added authorization fee billing considerations, Misuse of Authorization System penalty fees, customer “check card” hold issues, Interchange qualification issues and reconciliation issues associated with this process.  Instead you could consider processing a $0 authorization status check to make sure the card has not been reported lost or stolen. However, there are fees associated with doing this, so the lower costs and safer policy is to hold their card or for greater security their drivers license.

Often entrepreneurs give little thought and wait until the last minute to address the issue of how they will collect payment.  Without the proper research, they fall victim to unfavorable contract terms and put in place poor business practices that expose them to fraud and losses.  However, with a little forethought and planning, business owners can lower their cost, improve efficiency and reduce their risk.

10 Questions to Plan your Payment Acceptance Strategy

Of course every business is unique but there are some basic questions to start:

01.    Who will my customers be?  Consumer, business, corporate or government clients?
02.    What type of payments will I accept?  What payment methods will my customers prefer?
03.    When will I be paid?  After delivery or will you take deposits?
04.    Where will I interact with my customers? Will I be face-to-face, over the phone, web or mobile?
05.    How much will I be paid?  Large transactions differ from small transactions.
06.    How often will I be paid?  One time or recurring?
07.    What are my risks of non-payment / fraud?
08.    What type of disputes might I encounter?
09.    Will I extend trade credit and on what terms?
10.    What is my return policy?

Evaluate each payment method's benefit, risk and costs

After you answer these questions, you are ready to explore the world of choices in the payment industry.  From cash and check, to credit, debit and gift cards, to trade credit receivables, there is a mix of payment methods that should be considered.   Each payment method carries its own associated costs and advantages.  For example, accepting cash has a different cost than accepting a credit card card but there are still costs of handling cash and making change (making sure you have enough cash on hand, accounting for bills and coins, security issues including employee theft and risk of becoming a target of crime to name a few).   You may want to guarantee a paper check is good.  Your customers may demand 30 day payment terms.  Credit and debit card payments offer convenience but are not a guaranteed form of payment.  It is important to evaluate each payment method's benefit, risk and cost.

In today's business world it has almost become a necessity to accept card payments.  The convenience, speed, fraud protections, rewards and reporting provided by card payments are motivating factors that are taking market share from cash and paper check.  Consumers are using credit (specifically Rewards cards) and debit (Check Cards) to make purchases.  However, business-to-business, business-to-government and government-to-government card payments are experiencing major growth as each of these segments move to replace traditional invoices and purchase orders.  Purchasing cards (p-cards) offer speed and convenience while reducing the administrative expense of previously used methods of purchasing.  

As some of the most recognized brands in the world, Visa, MasterCard, Discover and American Express operate networks to issue and acquire card payments. In order to accept card payments, businesses need to establish a merchant account.  A merchant account is a financial account that allows businesses to take a card payment and convert it to an electronic cash deposit into their business checking account.  Merchant account fees, often referred to as discount rates, apply to each transaction processed through the card networks.  If you are accepting credit cards you are paying a percentage of your sales to do so.  And so are all the other businesses you are competing against.  It is important to take into consideration the cost of payment when pricing your product or service.  

Research What Others are Paying

Until recently, merchants had no resource for comparing rates with each other.  myRealRate.com  creates a nationwide database for comparing and sharing card processing expenses.  Business owners can calculate their Real Rate to accept card payments and then benchmark their rate against others of the same size within their industry.   For businesses just starting out this is a great way to get a feel for your specific industry and the average costs of card acceptance based on your projected sales volume or transaction size.  For existing businesses, one of the keys to how to lower your cost of accepting credit and debit card payments is to calculate your real rate and then run comparisons within your industry to see if you should go shopping for a new provider. 

Implement the Right Payment Technology

Your payment processing partner should help you understand the risk of payment fraud and help you implement best practices.  They should also help you select the proper payment solution.  Choosing the right payment technology is a key component in reducing cost and improving operational efficiency when accepting payments.  There are a variety of payment technologies to choose from including point of sale registers, wireless terminals, contactless readers, ecommerce payment gateways and check imagers to name just a few.  Depending on your customer profile and how they buy, you may need to implement and manage a variety of payment platforms.  

Consider Service

The payments industry is not a commodity business.  It is becoming more complex, with new rules and regulations, new pricing and qualification requirements, new payment technology and payment card industry data security compliance.   While it is important to have competitive rates, don't neglect the importance of the payment industry professional, whose advice and assistance will save you more money in the long run.