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.
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.
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.
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.