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 returns the sales draft with tip line to the card holder. The card holder leaves a 20% tip ($10), totals the bill to $60 and signs the receipt. The $50 approval code is submitted for the $60 sale. 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). However this rule does not apply to Visa/MasterCard branded gift cards, requiring that F&B staff recognize when these payment types are presented and are trained to follow specific procedures and communicate these to the card holder.

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 (certain restrictions apply*)
• Timely transaction settlement

* For Restaurants, an Approval code is good for up to 20% more than base authorization to cover the dollar value of the settled amount with tip except card branded gift cards where this allowance does not apply

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 tips 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.
• 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.
• Do not allow tips to be added to gift card transactions (or add a tip to a gift card as a separate transaction approval)
• 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 and PCI compliance issues should also be considered.  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. 

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Tabs, Tips and Chargebacks -- Best Practices for Restaurants, Bars and Night Clubs

Many small and midsize businesses (SMB) we consult with are afraid of implementing policies and procedures to better manage their accounts receivable (A/R) because they are scared of losing customers. The thought is that if they enforce the credit terms established during contract negotiations that their buyers will simply find someone else to do the job.

Are you scared of your customers? Is this fear preventing you from achieving A/R best practices? Don’t be afraid of making sure your customers pay you on time. The strength of your A/R processes sets the tone of your ongoing working relationship. If you allow buyers to explore how far they can push their payables and get away with it then what are you teaching your customers? Are you broadcasting that you are not good at managing and collecting your receivables? What else might you not be good at?

Successful SMB understand the impact of making good impressions. They create a professional web presence; develop impressive literature; record phone tree navigations to different departments and more, all in an effort to emulate the buyers’ experience of working with their larger industry counterparts. It’s important for company management to understand that how they operate trade credit is also a reflection on their business. Don’t let a fear of enforcing your credit terms permeate through your entire organization. Best practice trade credit administration policies that are clearly communicated to your staff and to your buyers will strengthen your reputation for running a tight ship.

Extending trade credit is essential to attracting and retaining customers but it comes with the responsibility of managing the costs of credit. For example, selling a 60 day term provides a "sales" benefit on the front-end to win business and separate you from competitors. Selling a 30 day term yet allowing your buyers to slip to 60 days is not a smart use of credit. If you originally negotiated a 30 day term only to find that your buyer is slow paying in as much as 60 days - but otherwise is a good customer - consider the carrot of bringing them current, then extending them 60 day terms, with the understanding that you expect them to honor your terms. This creates a better long term customer relationship verses doing nothing at all because at least you are getting paid. And keeping your customers within the credit terms you provide helps your organization better manage your cash flow.

It is the responsibility of the seller to manage their credit terms and failing to do so creates uncertainty for both the seller (When will payment arrive? Is my buyer doing okay? What’s my risk? How should I collect?) and the buyer (Will they deliver another order? Can I delay another week while I pay another vendor first?). Unchecked, this lack of structure, damages the fabric of the relationship.

It’s best to start your buyer relationship under a structured procedure for trade credit administration rather than trying to re-train them later. If you are moving your organization from lax trade credit policies to structured administration, this requires thoughtful client communication. Are you the best at what you do or the best financing source of free money? Maybe it’s both, but knowing how your clients perceive you is important as you communicate your improvements to your trade credit administration. Position this communication as a positive result of your company’s growth.

While flexibility in credit decisions should always be maintained and based on the best available information at the time, having structured policies and resources in place to help make these decisions is key. Are you ready to implement AR best practices?

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Don't Be Afraid of Accounts Receivable

By now all merchants should understand the importance of securing cardholder data.  Like other industry leaders, Vantage has been communicating constantly the need for merchants, particularly those using any type of PC based point of sale payment system connected to the internet to accept credit and debit cards, to secure their systems and networks and comply with the Payment Card Industry Data Security Standards.  

Our intent with this blog entry is to make clear to the merchant community the full financial risk of a breach.  If mag-stripe data is stored on your system's hard drive or log files and this data is stolen from your system, criminals can manufacturer counterfeit cards and use these counterfeit cards at stores to buy electronics, jewelry, etc., and you are responsible for these fraudulent card sales performed at other stores!   These compliance chargebacks can quickly add up in the tens, even hundreds, of thousands of dollars.  So until the card acceptance rules change (which Vantage is strongly lobbying for) your business is not only responsible for chargebacks on sales you make but for chargebacks on fraudulent sales made at other merchants with stolen card data from your system! 

A hacker can mine cardholder data from your system for days, weeks, or months, then wait a year or more before using the stolen data. Once the stolen cards are used, a sophisticated “Compromised Account Management System” will track them back to a common place of purchase. As the rules & regulations now stand, once your business has been identified as the compromised location, you are responsible for the costs of a POS forensics exam, remediation, mandated security monitoring, fines and chargebacks!

Protect yourself…

• Upgrade to a secure Payment Application immediately. Validate your  specific payment application brand and version number.
• In addition to upgrading your payment software, any old storage of prohibited data must be securely deleted from all systems, databases and log files. 
• Enforce network security on your POS. Insecure networks connected to the internet are prime candidates for attacks. 
• Secure remote management applications like PCAnywhere.  Turn on your remote management software ONLY when needed.
• A low tech alternative is to process your card payments using a credit card terminal not tied to your POS network. 

  If your system is connected to the Internet, hackers can compromise computer networks within your location to steal cardholder data!!  Don't think it will not happen to you.  Merchants just like you are getting compromised and it is putting their business at risk.  Please protect yourself, your business and your customer data.

  More resources available at http://www.vantagecard.com/resources/PCI_Data_Secrity.html.

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Alert! Risky business to operate insecure payment software