Split sales transactions. The Federal Deposit Insurance Corporation (FDIC) defines split sales as “the process by which a merchant uses two or more sales drafts for a single transaction to avoid authorization limits.” In effect, a sales transaction is split when a merchant divides the cost of a single transaction between two or more sales receipts, using a single cardholder account. A merchant may want to split transactions in an attempt to circumvent authorization limits imposed in its merchant account agreement. Payment processors prohibit the splitting of sales.
Split tender transactions. The ban, however, does not apply to split tender transactions, which also involve two or more forms of payment (for example, cash and credit card). Split tender transactions most often occur when consumers use gift cards to buy goods and services that cost more than the value of the card. In such cases consumers have to make up the difference with cash, credit or debit card or with another form of payment. Although payment processors do not prohibit split-tender transactions, some merchants may only allow the second form of payment to be cash or check. The restriction is due to the additional processing costs that would be accrued if the second payment were made using a bank card.
Why merchants split sales transactions. When applying for a merchant account, two of the questions the merchant is asked to answer in the application form are about the expected average single sale’s amount and overall monthly or annual card processing volume. Payment processors use this information to help them analyze the merchant’s potential risk exposure. Larger average sales amounts, for example, are riskier because, in a case of a customer dispute or a charged-back transaction, the potential loss is larger, compared to smaller amounts. For example, a dispute over a $10,000 wedding ring is potentially much more costly than one over a $10 movie ticket. Similarly, an overall monthly processing volume of $1 million holds greater potential liability than one of $10,000. The merchant’s card processing rates are established in part to reflect the risk exposure and the authorization limits are assessed and enforced accordingly.
Once a merchant account is set up, the processor will monitor the sales transactions and, if the merchant significantly exceeds its projected single sale’s amount on multiple occasions, a red flag will be raised and the merchant’s funds may be placed on hold until the situation is investigated. If, as a result of the investigation, the processing bank determines that the larger-than-expected sale’s amount is not an aberration, the processing rates may be increased or a processing limit may be imposed, in order to address the increased risk exposure. Additionally, the processor may place a certain percentage of the merchant’s funds in “reserve,” under which a portion of the monthly revenue from the merchant’s card transactions will be held in an escrow account as an insurance against possible loss from chargebacks and other sources.
This is the reason why a merchant may try to split sales. This is also the reason why split sales transactions are prohibited.
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