How to Process Zero-Percent-Tip Credit Card Transaction Authorizations

When processing credit card transactions, merchants are not allowed to estimate the amount of the tip and include it in the authorization request sent to the processing bank. Taxicabs, limousines, bars, taverns, beauty salons, barbershops, health and beauty spas, and restaurant authorizations are automatically assessed a 20 percent additional authorization amount to cover the expected tip. What this means is that the authorization request should only be for the actual amount of the bill. If the customer leaves a tip, the merchant should go back to the credit card terminal and adjust the transaction amount. The merchant must ensure that the customer signs a receipt for the total amount.

According to Visa, the “zero-percent-rule” was enacted to prevent the appearance that the cardholder was overcharged, when they review their account activity. An estimated tip can reduce the cardholder’s available credit by an amount he or she does not recognize or expect. Cardholders today can, and do, check their credit card activity online in almost real time. If they see an amount that they do not recognize, they are likely to contact their card issuer and ask questions about the transaction or file a dispute. Here is how Visa explains it in its merchant guide:

Say, for example, a cardholder’s restaurant bill is $100, but the staff adds on a 20 percent tip — that is, $20 — for authorization purposes. If the cardholder only adds on a $15 tip, or leaves the tip in cash, the authorization “hold” on the larger amount may make it appear he or she was overcharged. And that, in turn, can mean angry phone calls from unhappy customers – and the potential for reduced business.

Moreover, in addition to the angry phone call, the merchant is likely to receive a chargeback.

In order to ensure that the zero-percent-tip authorization rule is applied to all transactions, restaurants and other merchants accepting tips should implement the following procedures:

• Train your staff to request authorizations only for the amount of the bill and explain why they should do so. Your personnel should understand the consequences of authorizing amounts that are higher than the amount of the bill and follow the procedure without exceptions.
• Make sure that your authorization system is set up for zero-percent-tip authorizations. If you do not know how to do that, contact your point-of-sale (POS) terminal provider and request that your machines are programmed to authorize only for the known bill amount.

In cases where the customer leaves a tip greater than 20 percent of the amount of the bill, the merchant must request authorization for the additional amount, as the original authorization only covers the first 20 percent of the tip.

Both Credit Card Associations (Visa and MasterCard) actually provide chargeback protection for merchants who customarily accept tips. Their transaction authorizations are automatically valid for the transaction amount plus 20 percent to protect merchants from chargeback liability for an incorrect or disputed transaction amount.

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