Credit Card Processing Blog

All types of unattended point-of-sale (POS) terminals can be programmed to not process credit card transactions above a pre-set amount. There are also, however, limits on the highest allowable amounts that merchants can process on cards at unattended terminals, which are set by the Associations and exceeding them leads to automatic chargebacks.

Visa issuers use Reason Code 96 to designate chargebacks resulting from transactions that exceed the limit. In this article I will review the specific circumstances in which this reason code can be used and what merchants can do to prevent or remedy it.

What Causes Reason Code 96

Chargeback Reason Code 96 is initiated by Visa issuers when they receive a transaction that exceeds the allowable amount from a Limited-Amount Terminal, a Self-Service Terminal, or an Automated Fuel Dispenser (AFD) transaction. The specific cause will be that the merchant processed a transaction from:

• A Limited-Amount Terminal and exceeded $25.
• A Self-Service Terminal (excluding AFD) and exceeded $50.
• An AFD and exceeded:
  • $150 for Visa Fleet cards.
  • $75 for all other cards.
  • $500 for a real-time clearing transaction.

This reason code is used for international transactions as well, but the conditions are different and I will not review them here.

How to Respond to Reason Code 96

As with all other types of chargebacks, your response to a Reason Code 96 will be determined by the specific circumstances, the most typical of which are listed in the table below, along with my suggestions on the course of action you should take:

*For AFD transactions, the chargeback amount is limited to the amount exceeding the specified amounts listed above.
**To avoid such chargebacks, make sure that your processor has programmed your convenience store and AFD terminals with the correct Merchant Category Codes (5541 and 5542, respectively).

How to Prevent Reason Code 96

The only thing you need to do to prevent this type of chargeback is to make sure that your POS terminals are properly set with the transaction amount limits, so that your customers are not allowed to complete a transaction above this threshold. Your processor and terminal vendor should be able to help you do that. In fact, your processor should be proactive in setting the applicable limits.

The Takeaway

Unlike most other types of chargebacks, the actions of your customers have nothing to do with Reason Code 96, which is entirely the result of improper POS terminal set-up. It is arguable whether or not you should be aware of the allowable amounts applicable to the types of transactions you process at your terminals. What is not at all arguable, however, is that your processor should know what these limits are and should ensure that your terminals are compliant. If they failed to prepare you for something as basic as that, what else may they have missed?

Learn how to minimize chargebacks and fraud

Learn how to minimize chargebacks and reduce your processing costs. The Chargeback Management Kit contains a video and an e-book:

• E-Book – Chargeback Manual (40 pages).
• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).

Prepaid cards have been in the news quite a bit lately and not least thanks to the controversy surrounding Suze Orman’s prepaid card. This latest dust-up confirmed my belief that the vast majority of consumers are very poorly informed about this type of payment product, a fact which unfortunately Orman tried to exploit.

So when this morning I read yet another news headline praising prepaid cards as a “Safe, Secure and Cost Effective Way to Manage” personal finances, I instinctively prepared myself to be underwhelmed by what followed. I was proved correct. The author was citing some dubious statistics, attempting to convince us that prepaid cards are a much cheaper alternative to a low-balance checking account, but the numbers simply didn’t add up.

The Case for Prepaid

By the way, I should first say that I’m referring to a press release issued by the Network Branded Prepaid Card Association (NBPCA), so of course we should be expecting them to be praising the virtues of prepaid cards and that’s perfectly fine. Yet, that doesn’t give them a carte blanche to say anything they please.

Anyway, here is NBPCA’s argument:

Stacked up against low-balance checking accounts, the yearly cost of using a prepaid debit card is less.

Then they bring up a study from a consulting company – Bretton Woods – to back up their claim. So here are the cost-comparison numbers that are supposed to convince us:

Furthermore, we are told that “[t]he reloadable prepaid card costs would decrease after the first year by the amount of the activation fee.”

As soon as I read these numbers, I knew that this just couldn’t be right. This report is covering 2009 and 2010 and is taking its checking account numbers from just four banks: Bank of America, Citibank, JP Morgan Chase, and Wells Fargo, which for the most part were offering free checking back then. So how is it possible then that a checking account with these banks would have cost users a minimum of $218.35 in 2010?

The Numbers Are What You Make of Them

Well, the Breton Woods researchers tell us that the $218.35 2010 checking account usage cost is calculated for a “usage profile” that is “relevant for a consumer to meet their basic transactions needs.” A cardholder fitting this profile would participate into the following transactions:

• 3 ATM withdrawals.
• 3 bill payments (rent, utilities and phone).
• 8 point of sale purchases (groceries and meals once a week).
• 4 balance inquiries.
• 2 deposits/loads.

Well, but these things were and still are free for account holders at the four banks under examination. So the question remains: where does the $218.35 number come from?

Eventually we discover the culprit and it’s a familiar one: overdraft fees. We learn that “active household users of overdrafts incur more than four overdrafts per month, or 51 per year.” So, for good measure, the researchers “include five overdrafts per year” in their usage profiles.

You just can’t do that. I’m not sure exactly what their definition of “active household users of overdrafts” is, but whatever it is, it does not encompass the entire group of checking account users, far from it. So, if anything, the usage profile should be the victim of fewer overdrafts than an “active household user,” not more.

I wasn’t able to find another source of checking account fees in the report, so it all seems to come down to overdraft.

And as far as the numbers for prepaid costs are concerned, it is very difficult to verify them. It is possible that the lowest annual usage cost will be $76.35, but the average will certainly be much, much higher. Just take a look at the pricing disclosures for each of the prepaid cards under examination here – AccountNow, Green Dot Visa/MasterCard, NetSpend Visa, ReadyCard, RUSHCARD and Walmart MoneyCard Visa – and you’ll see what I mean.

The Takeaway

Prepaid cards definitely have a place in our financial system and it is true that their quality has been improving, as issuers have been trying hard to steer their customers away from debit cards, which in the wake of the Durbin Amendment have become a poor source of revenue for them. However, even today’s high-quality prepaid cards are loaded with fees that would be triggered if the cardholder does or fails to do something. This is why Suze Orman tells us that her card would cost users “[o]nly $3.00 a month if you use it how I tell you to.” The problem is that the “unbanked,” who make up the vast majority of prepaid users, have been cut out of the system precisely because they weren’t doing what they were told.

So prepaid is still the best card only if no other option is available to you. Checking accounts and the debit cards linked to them are still a much better alternative for consumers with access to the financial system, even if they have to pay a monthly fee for it.

Image credit: LeaveDebtBehind.com.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).

There is a new entrant in the market for mobile credit card acceptance which, though increasingly crowded, is being dominated by Square. Unlike the brainchild of Twitter creator Jack Dorsey, which allows everyone to accept credit card payments through a small swiping device attached to the user’s phone, Card.io does the trick by scanning the card.

We haven’t tested the new service yet, so I can’t comment on its performance and reliability. However, I do like the idea behind it and that’s what I will focus on in this post. That and how it stacks up against Square, because if it is to have any chance of success, Card.io must convince its potential users, many of whom are already using Square, that switching to the new m-payment provider makes sense.

How Card.io Works

Here is the part I like the best about Card.io: it doesn’t put any new hardware into your pocket. All you need to accept credit cards is your phone, with support currently available for Apple and Android-based devices.

Once you’ve signed up for the service and have downloaded the app, accepting payments is incredibly simple. You launch the app and hold your customer’s card to your phone’s camera for a second or two until it captures the image (that is the equivalent of the swiping of a card through the Square reader). Then Card.io “reads” the account information from the image, you enter the payment amount and submit the transaction for processing.

Card.io supports acceptance of all major U.S. card brands. There are no set-up, monthly or cancellation fees and the transaction rate is 3.50% + $0.30 for all brands and types of cards.

Card.io vs. Square

As many of Card.io’s potential users are already Square customers, what will determine the newcomer’s future is how successfully it measures up against the market leader. Or rather, how that is perceived by consumers. I think that there are three major factors that will feature in anyone’s comparison of the two rivals: pricing, convenience and security, perhaps in that order. Let’s take a look at each one of them.

Pricing. Card.io’s per-transaction rate of 3.50% + $0.30 is higher than either of the two tiers used by Square: 2.75% for swiped transactions and 3.50% + $0.15 for key-entered ones. Perhaps Card.io can lower its rate if it finds it difficult to attract users, however the start-up operates from a higher base rate than its rival, which limits its options. What I mean is that, while Square’s swiped transactions are classified as “card-present,” all of Card.io’s transactions are “card-not-present.” The significance of this classification is that, while Square’s cost of processing, say, a Visa rewards card would be 1.65% + $0.10, the equivalent cost for Card.io would be 1.95% + $0.10.

So the pricing advantage goes to Square.

Convenience. Well, Card.io has dispensed with all peripheral hardware, while Square users need to carry the little reader everywhere and try not to lose it.

Provided the scanning process works quickly and reliably, the advantage here goes to Card.io.

Security. Square had its share of security and fraud scares early on, but it handled each crisis very well and all these troubles are now behind Jack Dorsey and company. Card.io is likely to face similar challenges, but the good news for the start-up is that Americans are now quite comfortable with the idea of accepting card payments with their phones, so the newcomer will be given the benefit of the doubt.

I would score the security component of our comparison chart as a tie. Yes, Square is backed up by a strong safety record, but there are no reasons to think that Card.io will be any less secure than its rival.

The Takeaway

So the idea behind Card.io does have its merits and I will not be surprised at all if the start-up is successful in implementing it. In fact, I do hope that they will achieve that, as I really like the simplicity of their solution.

However, the start-up’s success, or lack thereof, will be decided by how favorably its service compares to Square’s, as perceived by users. Of course, to be able to make a comparison, potential users must first learn about Card.io, so how much the newcomer can spend on promoting itself may prove at the end to be the deciding factor.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).

We received an incredible amount of feedback to our post last week on the Zappos data breach. The interesting thing about it was that while most of the readers came from our Facebook page, where all of our new articles are immediately posted, and a decent number of them hit the “Like” button, the vast majority of the responses came from Twitter. As a side note, that is beginning to become a trend now and we’d be interested in hearing what experience you’ve had with reader engagement to blog posts published on your business’ Facebook page and a Twitter account.

But let’s move on to the issue at hand. It’s been ten days now since Tony Hsieh, CEO of Zappos.com, the Amazon-owned online shoe and apparel retailer, announced in an email that his company had suffered a data breach. We were so impressed by Zappos’ response that we analyzed in detail Hsieh’s email in our initial post and suggested that everyone who may ever have to deal with a similar crisis should use it as a template. But how has the company done since then and more importantly, how have Zappos’ customers been affected in the event’s aftermath?

Well, the retailer has again done an outstanding job and deserves the highest marks for its efforts and, as best we can tell, its customers have suffered no lasting damage at all.

What Has Zappos Done since It Announced the Data Breach?

Following the initial email announcing the breach, Zappos has published two updates on the web page that was specially created for the purpose of keeping customers, and the outside world at large, informed on the progress the retailer was making in getting things back to normal. These updates were terse and to the point.

The first one explained the meaning of a technical term – “cryptographically scrambled” – and informed readers that the company was cooperating with the FBI in its investigation, which is following the standard procedure for dealing with the aftermath of a data breach.

The second update announced that Zappos’ phone system was again functioning as normal, after being intentionally turned off following the event, because it would not have been able to handle the expected volume of incoming calls (which was explained in Hsieh’s email).

So, while the investigation is still ongoing, things are now back to normal at Zappos. But what were the consequences for its customers?

What Is the Damage to Zappos’ Customers?

I read somewhere that the attorneys for a Zappos customer are seeking a class-action suit against the retailer, which was more or less to be expected. But how justified are consumers’ worries in this case? Well, to answer that question we’ll need to understand exactly what information has been compromised.

Zappos told its customers that:

[T]here may have been illegal and unauthorized access to some of your customer account information on Zappos.com, including one or more of the following: your name, e-mail address, billing and shipping addresses, phone number, the last four digits of your credit card number (the standard information you find on receipts), and/or your cryptographically scrambled password (but not your actual password).

We were also told that:

THE DATABASE THAT STORES OUR CUSTOMERS’ CRITICAL CREDIT CARD AND OTHER PAYMENT DATA WAS NOT AFFECTED OR ACCESSED.

So the hackers seem to have gained access to some of the information stored in Zappos’ customer profiles. It is unclear whether or not the criminals may have been able to actually access the customers’ accounts, because we don’t know if they could have retrieved the associated passwords. But even if they could have done that, that wouldn’t have been all that big of a gain. They could have attempted to place an order, which, even in the unlikely event that it went through, would’ve been immediately disputed and the cardholder would have been reimbursed for any financial losses. Moreover, any bank card information that may have been stored in a compromised profile would have been unusable, because it only displays the last four digits of the account number.

At the end, given that the data breach was immediately discovered and the passwords reset, the criminals would have been left with information that for the most part is usually freely available on Yellow Pages.

The Takeaway

The significance of the Zappos data breach should not be minimized and I’m not attempting to do so. Such events are potentially hugely damaging both for the affected business and its customers, so every effort should be made to prevent them from occurring. If a business is found to have not complied with existing data security standards or to have otherwise been lax in safeguarding sensitive customer information, it should be held accountable for its carelessness. We don’t yet know whether Zappos is guilty on any of these counts, so, though I reserve the right to comment on that issue when information becomes available, I can’t do so at present.

However, the fact remains that Zappos’ response to the crisis has been exceptional and the company deserves to be commended for it. But the real good news is that Zappos’ customers have suffered no lasting damage.

Image credit: REUTERS/Zappos.com/Handout.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).

WSJ’s Robin Sidel has a piece about the effect of the Durbin Amendment on the debit card interchange fees charged by credit unions and small banks. Or rather, the lack of a direct effect, as financial institutions with assets of less than $10 billion were unaffected by the regulation.

That is an interesting topic for a number of reasons and not least because when the exclusion of smaller financial institutions from the Durbin Amendment’s scope was first proposed, we heard quite a few uneasy voices from the under-$10 billion financial world. See, the small-bank concern was that, by allowing them to charge substantially higher debit card transaction fees than their bigger competitors, the Durbin Amendment would make them very unpopular with retailers and may prompt them to take retaliatory actions.

Now Sidel is reporting signs of a retailer backlash against this special treatment. But what actually prompted me to comment on her story was the fact that she has made some misleading statements about the structure of payment processing fees. This is important and is something many non-industry observers don’t seem to understand. Let me explain.

What Did the Durbin Amendment Do?

In order to understand what is wrong with the WSJ piece, you first need to understand what the Durbin Amendment did and what it didn’t do. So the Durbin Amendment mandated that the Federal Reserve ensure that debit card interchange fees are “reasonable and proportional.” The Fed responded by placing an upper limit of about $0.24 (0.05% + $0.21 + $0.01 per transaction), on average, on these fees, which is 45 percent lower than the pre-reform average of $0.44.

Now, what are interchange fees? These are the fees collected by issuers every time one of their cards is used for payment. These fees make up only a portion (which can and does vary greatly in relative size from one merchant to another) of the total amount paid by merchants for the processing of each card transaction.

The other portion of the card processing fees is charged by the payment processor, which is an entity that is separate from the card issuer and which has entered into an exclusive agreement with the merchant to enable it to accept bank cards for payment. The Durbin Amendment did not touch this part of the processing fees. Moreover, the processor-charged fees are the same for all debit cards, irrespective of whether they are issued by a large or a small bank. There are no reliable data on the average size of these fees, but what is known is that they can cover an enormous range and typically the very large merchants can squeeze them almost to the point of oblivion.

Who Collects Your Debit Card Fees?

Now that you know what the reform did and didn’t do, we can proceed to Sidel’s story. Here is the passage that caught my attention:

[S]mall banks and the middlemen that process their debit-card transactions will collect fees that are often three times the size of those imposed on cards issued by big banks. For example, a $100 sweater purchase made with a debit card would incur a fee of 95 cents on a card issued by a smaller bank, more than triple the 26 cents for debit cards issued by big banks.

Let’s break this down.

In the first sentence we are told that the total processing fees charged by a small bank can be “often three times the size of those” charged by a large bank. While it is true that small-bank debit interchange varies, while large-bank interchange no longer does, this is a misleading statement. You now know that, on average, the interchange fees charged by smaller banks will be less than twice as large as the ones charged by the bigger ones ($0.44 vs. $0.24). You also know that the processor’s fee is precisely the same for all debit cards, which additionally minimizes the difference.

But the second sentence is even more misleading. It is not that the example given by Sidel is necessarily unrealistic. On the contrary, it may, and probably is, a real-world one. In fact, we can find examples of even bigger discrepancies in favor of the small banks. But we can also give the following real-life example (using the $0.02 per-transaction processor fee that Sidel is using in her calculations):

A $3 latte purchase made with a debit card would incur a fee of 24 cents ($3 x 0.05% + $0.22) on a card issued by a big bank, almost triple the 9 cents (calculated using the 1.55% + $0.04 Visa CPS / Small Ticket, Debit interchange rate) for debit cards issued by small banks.

So we can also find substantial differences in favor of the large banks. Our calculations show that under the new pricing structure big issuers will be making more money from debit transactions in amounts of up to $11 or so than they were under the old one. This is why it is important to look at the averages when making such general statements.

The Takeaway

So the Durbin Amendment’s impact on processing fees is much more subtle than Sidel and many other commentators realize. And the biggest thing non-industry observers don’t seem to understand is that for a very large number of merchants the Durbin Amendment’s impact will be precisely non-existent. The reason is that the most prevalent pricing model out there – the tiered one – which comes in many different shapes and forms, does not pass any interchange savings (or dissavings, for that matter) on to the merchant. Instead, these differences, either positive or negative, are absorbed by the processor. But this is a topic for another post.

Image credit: WinonaDailyNews.com.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).