Inside the Black Hole

At UniBul Merchant Services we work mostly with e-commerce and MO / TO (mail order and telephone order) businesses and the topic of recurring payments naturally keeps popping up in our conversations with existing and prospective clients. We have of course written on the subject multiple times before, but it is worth revisiting it every few months and share anything new that we may have learned in the interim.

Recurring payment plans present merchants with many challenges they don’t get to deal with when processing one-time transactions. Such arrangements can last for years, during which time many things can and do happen that prevent a monthly payment from being processed, even though dozens may have previously gone through without a hitch. You need to know what can cause such issues and how to minimize the chance of it happening. Here are twelve tips to help you do just that.

12 Tips for Processing Recurring Payments

The following guidelines will help you set up a recurring plan correctly and manage each successive payment effectively:

1. Allow your customers to choose the billing date. Doing so will help ensure that funds are available in the cardholder’s account.

2. Inform your customers of how the transaction will appear on their card statements. The way your business name and phone number are displayed on your customer’s statements and in their transaction activity logs is managed through your merchant account‘s billing descriptor. Contact your processor and make sure that your billing descriptor is set up to correctly show your “Doing Business As” name and customer service phone number.

3. Clearly disclose your cancellation policy. To minimize chargebacks and comply with industry regulations, provide a concise, straightforward disclosure of your policy on both the service agreement and your website.

4. Provide details about the billing arrangements. Clearly disclose all charges related to the delivery of products and services.

5. Discontinue billing immediately upon cancellation. Provide customers with a cancellation confirmation that informs when the last payment will be processed, if one is still due, or, if applicable, when credit will be issued.

6. Inform customers of any delay in the delivery of products or services. Provide a new delivery date.

7. Provide a customer service phone number. There is no better way to resolve most issues than a phone conversation, so make sure your customers know how to contact you.

8. Inform customers of their right to terminate a recurring transaction. Recurring transactions can be cancelled and your customers need to know that.

9. Make sure that all payments receive an authorization approval. Even though you have your customer’s consent to process each payment of a recurring plan and have received an authorization approval for the first one, you still need to authorize each successive transaction before submitting it for clearing.

10. Include the Recurring Payment Indicator with all transactions. Contact your processor for assistance, if needed.

11. Ask for an alternative payment method if an authorization request is declined. Over time, payment information changes, even for active credit card accounts. At the very least, bank cards are renewed every few years and new expiration dates are issued, which alone may lead to an authorization decline. When that happens, request another form of payment and ask your customer to update her billing details.

12. Send a pre-billing notification 14 days before processing a payment. Do it regularly and you will see fewer customer disputes. Here is a sample of how such a notification should look:

To: customer name@account.com From: merchant name@account.com

Subject: Recurring transaction notification Date: 28 December 2011 04:26:13 -0500

Dear Customer Name,

This email confirms your authorization of the transaction listed below, entered on 12/28/2009 at 2:03:38 PM has been processed and will be debited from your account.

Transaction Origination Date: 12/28/2011

Name on Account: Cardholder Name

Amount: $14.95

Description: Approved recurring charges on 2011-11-28

You have authorized Merchant Name Services, Inc. and you financial institution to initiate the transaction detailed below. You have acknowledged that the origination of debit or credit transactions to your account must comply with the provisions of local laws. This authorization is to remain in full force and effect until Merchant Name Services, Inc. has received written notification from you of its termination in such time and manner as to afford Merchant Name Services, Inc. and your financial institution a reasonable opportunity to act on it.

Processed for: Merchant Name Services, Inc.

Phone #: 800-111-1111

Email: merchant name@isp.com

If you process higher volumes of recurring payments, you may want to consider enrolling into Visa’s and MasterCard’s card account updater services, which help keep information current by updating it every time there is a change in the account number, expiration date or some other item.

The Takeaway

If you stick to these best practices and make them part of your payment processing routine, you will have fewer customer disputes and chargebacks to deal with. As you gain experience, you should add your own items to this list and I hope you’ll share them with the rest of us.

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).

U.S. merchants are required to comply with a set of basic payment acceptance rules governing all bank card transactions. These requirements may vary in their details from one card brand to another, but in their essence they are broadly the same. Sticking to these rules will help keep your merchant account in good standing, but it is also a proven way to improve customer satisfaction, which then leads to fewer disputes and chargebacks.

14 Credit Card Acceptance Rules You Should Stick To

1. Accept all types of cards whose brand you have a contract with. So, if you have agreed to accept MasterCard products, accept all of them: credit, debit, prepaid, etc. Do not discriminate against the cards that are more expensive for you to accept, for example rewards or business-to-business cards. Doing so, even if it were allowed, would create unnecessary confusion and discontent among your customers.

2. Include any applicable tax in the total transaction amount. Do not collect taxes separately from the sale’s amount.

3. Do not set a minimum purchase amount above $10. U.S. merchants are now allowed to set a minimum sale’s amount on credit card transactions, but it should not exceed $10. Additionally, the minimum should be the same for all card issuers and brands, and it must not apply to debit card transactions.

4. Comply with any applicable maximum sale’s amounts. Some federal agencies or institutions of higher education have set maximum purchase amounts on transactions made with their credit cards. These maximums are again universal for all brands and do not apply to debit transactions.

5. Do not impose surcharges on card transactions. This requirement can be somewhat confusing, because there is an allowance for convenience fees (see below). Still, surcharges are not allowed, although you can offer discounts for using other payment methods.

6. You can add a convenience fee to the transaction amount. You can do so if you offer alternative payment channels to your customers, such as mail, telephone, or e-commerce. We will publish a more detailed post on convenience fees in the coming weeks.

7. Do not use credit cards to refinance existing debts or for payment for uncollectible debts. Bounced checks fall in the latter category.

8. Do not process credit card payments for other businesses. Doing so is known as laundering and is strictly prohibited. It is a form of fraud and committing it will lead to the termination of your merchant account and possibly to criminal prosecution.

9. Always authorize only for the known amount, not including any estimated tip. This requirement applies to restaurants, taxis, limousines, bars, taverns, beauty shops, health spas and all other merchant types that routinely accept tips. It is known as the “zero-percent tip” rule. Authorization requests from these merchants are automatically approved for a 20 percent additional amount to cover the expected tip. However, if the exact amount of the tip is known, then it should be included in the authorization amount. This is typical for chip-and-PIN transactions.

10. Do not issue cash refunds for credit or debit card transactions. Any refunds for returned merchandise or adjustments must be processed on the same card used in the sales transaction. Doing so protects cardholders from criminals who may fraudulently use their cards to make a purchase and then return the merchandise for cash. Exceptions are allowed for prepaid cards, which may have been discarded prior to the return.

11. Deposit your transactions within three business days of the transaction date. Ideally, you should do it on the day following the transaction. In a card-not-present setting, the transaction date is the shipping date, not the order date.

12. Ensure that only the last four digits of the card number are shown on the sales receipt. The preceding digits should be replaced with special characters. The expiration date should not be displayed at all on the transaction receipt. All new point-of-sale (POS) terminals should comply with these requirements.

13. Obtain two authorizations for each delayed delivery. Delayed deliveries are typically associated with custom-made merchandise, where a deposit is made at the time of purchase and the balance is paid upon delivery. The first authorization would be requested for the deposit amount and the other – for the balance.

14. Maintain compliance with the PCI DSS. The Payment Card Industry Data Security Standard (PCI DSS) is a set of security requirements that are mandatory for all U.S. merchants. Your processor is responsible for ensuring your compliance and will have contracted with a certified PCI DSS vendor who will contact you and guide you through the validation process.

The Takeaway

Some of the above rules may not be applicable to your particular circumstances and there may be others that are specifically designed to regulate your type of business (for example, e-commerce websites have their own requirements to comply with). Still, these are the most basic rules governing the payment card industry and you should make them the foundation of your card processing procedures.

Image credit: DRB Systems.

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).

Last week we looked into store-branded (also called private-label) cards and examined what makes them different from regular credit and gift cards, from a consumer standpoint. However, the differences can be even greater from a retailer’s point of view.

Private-label cards present merchants with the unique, although often underutilized, opportunity to use the cards to influence their customers’ buying decisions. It is true that gift cards can be used for the same purpose, but store-branded cards provide both more options and flexibility. An example for a merchant who has taken a great advantage of this opportunity is Zales, a jewelry retailer, which reported that 40 percent of its U.S. revenues came from purchases made with its private-label cards.

Are you getting the most out of your own private-label program? Is using your store’s card an attractive a payment option for your customers as it could be? This article will help you answer these questions and will give an idea or two on how to increase private-label revenues.

6 Ways to Make Customers Like Your Store-branded Credit Cards

Here is a list of six strategies to help you make store cards a more attractive payment option for your customers and increase your private-label revenue in the process:

1. Use ongoing discounts and special offers. Why limit your program to the usual 10 – 15 percent discount on the first purchase? Give your customers a discount every time they use your store’s card. The discount does not have to be as big as the initial one (many credit card rewards programs do perfectly well with one or two percent cash-back options). Or you can offer discounts on specific items (e.g., exclusive or private-label branded products).
2. Offer more attractive payment terms. Extend the promotional terms to make the minimum payment option a more appealing one to your customers. Alternatively, offer a plan consisting of equal monthly payments, which is the preferred choice for many consumers.
3. Give rebates. There is no need to rediscover the wheel. Card issuers have been very successful with rewards programs that give customers various rebates or points when using their cards. Take a page of their book.
4. Upgrade your account management tools. Give your customers access to advanced features like fraud alerts, payment reminders, paperless statements and mobile payments. It will not only help them manage their accounts more easily and conveniently, but it will also make you look like a “real” card issuer, not one who’s doing it as a sideshow.
5. Offer co-branded debit cards. Debit cards are the most-widely used payment card in the U.S. and the second-fastest growing, behind prepaid. The Durbin Amendment made them less profitable for issuers, but your primary objective should be to increase sales. Profits from transaction fees, while welcome, should be a secondary priority (and anyway that’s only a consideration if you issue your cards directly). Consumers like debit, so why not giving them what they want?
6. Offer prepaid cards. As already mentioned, prepaid is the fastest-growing payment card type in the U.S., so the same rationale about giving people what they want applies to them as it does to debit. Moreover, they were exempted from the Durbin Amendment regulations, so prepaid is good from an issuer’s perspective as well.

I’m sure there are other items that can be added to that list, but it will at least get you started. Feel free to tell us about your own ideas in the comments below.

The Takeaway

You should constantly be looking for ways to improve your private-label program. Remember that, even if your cards are underwritten and issued by a bank, rather than by your own company, your customers will still associate them with your own brand, so their experiences as cardholders and customers will blend into one.

This equivalence in the minds of your customers between their shopping and payment experiences is unique to store cards and presents both an opportunity, as well as a challenge. To take advantage of the former and successfully meet the latter, you should treat your private-label card program as an inseparable part of your brand, rather than simply as another tool for generating revenue.

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).

Restaurants that accept credit cards, like gas stations and super markets, enjoy some benefits that are unavailable to most other merchants. For example, no signatures are required on transactions under $25, which speeds up the checkout process at quick service restaurants. Even more importantly, restaurants get special interchange rates, which are often lower than what other card-present merchants have.

There is a peculiar feature of restaurant transactions, however, that differentiates them from the rest of the field. It has to do with the tip that is added to the check amount. Restaurant owners and managers need to know how to authorize and process card transactions, so that credit card rules are complied with, customers are kept satisfied and chargebacks are prevented. In this post I will explain how to do that.

0% Tip Transaction Authorizations

You should always request authorizations for the check amount, excluding any tip amount! It is critical that you understand and comply with this rule. There are at least a couple of reasons why you should leave the tip out of the authorization request, as illustrated by the following hypothetical scenarios:

• The check amount is $50 and you request an authorization approval for $60 ($50 + 20%). You get your approval and the cardholder is charged $60, however he decides to leave $8 in tip, which brings the total to $58.
• The check amount is $50 and you obtain an authorization approval for $60. The customer’s card again is charged for $60, however he decides to leave a tip in cash, so the total is $50.

In both of these scenarios, the restaurant overcharges the customer, which will inevitably lead to a dispute. If you are lucky, your customer will call you first, so you can issue a refund and the whole thing will only end up costing you the time for handling the refund (which can add up). If you are not so lucky, the customer will call his issuer and initiate a customer dispute. Either way, your customer may feel cheated by you and decide to not come back to your restaurant again.

What you need to know is that restaurant authorizations are valid for the check amount plus 20 percent, so that there is no need for you to add an estimated tip amount to the authorization request. Only if your customer leaves a tip that is greater than 20 percent of the check amount you will need to request an additional authorization for the difference (the amount above the sum of the check and tip amounts).

How to Handle Restaurant Transactions

So with the above information in mind, let’s review some of the unique restaurant credit card acceptance best practices. All regular transaction processing procedures apply, so there is no need to go over them.

• Return the right card to its cardholder. During your busiest hours, you may end up collecting quite a few cards, so it’s important to match the card to the sales receipt, before returning them to your customer. I know it can get a bit hectic in rush hours, but you should make the few seconds needed to compare this information.
• Don’t charge a penalty fee for a reservation cancellation or “no show” without proper disclosure. You must clearly disclose your cancellation or no show policy at the time the reservation is made.
• Match the account number on the receipt to the one on the card. Needless to say, these two numbers must be identical. Otherwise, you may be dealing with a counterfeit card and will have to make a Code 10 call.

To reiterate, all regular credit card processing procedures must be followed, including requesting and obtaining an authorization approval and verifying the validity of the card and the cardholder.

The Takeaway

Restaurant credit card transactions are considered very low risk by Visa and MasterCard, which is why they get lower interchange rates. Of course, every now and then we hear about a skimming scam somewhere, but overall a restaurant is as safe an environment to make a card payment as there is.

It’s up to you to keep it that way and it doesn’t take much to do so. Just follow the above suggestions and you’ll be fine. As far as skimming is concerned, you need to be careful with whom you hire. You may also want to consider instituting a policy for completing card payments that would cover the whole process from taking the card from the customer to swiping it to returning it back. Ideally, you would want to have someone supervising the entire process, so that to make it difficult for a crooked employee to hide somewhere and swipe the card through a skimming device.

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We have written about credit card receipts in multiple articles on this blog in the past, however a recent episode involving one of our merchants has reminded us of the importance of the subject and prompted us to re-open the topic.

The Story

The merchant at issue, who will have to remain anonymous, had just signed up with us, switching from a competitor. It is a small furniture retailer, doing about $150,000 in revenues per month from brick-and-mortar operations. The merchant’s average sales amount was about $650, so they had about 230 sales transactions per month.

The first month they had two disputes from customers who claimed that the merchant had not honored their return policy and had not issued a credit. One of the disputes resulted in a chargeback. The second month there were five disputes, again involving refund issues and this time three of them resulted in chargebacks. This is when the merchant’s problems began.

The Issue

Merchants with a higher average ticket amount fall into a special risk category, even if they accept payments in a face-to-face setting. The reason is that their transaction count is typically fairly low and even a small number of chargebacks can quickly get them into trouble with their processor. This is exactly what happened with our merchant.

Visa and MasterCard require processors to ensure that merchants keep their chargeback rates at below one percent. Processors are very strict in enforcing this requirement, because they get penalized when merchants exceed that threshold. So strict, in fact, that often merchant accounts get suspended when the chargeback rate reaches one half of one percent.

In the case of our merchant, their chargeback rate for the second month was 1.3%. This was an unacceptably high level, even though they only had three chargebacks.

The Cause

We initiated a review of our merchant’s sales and payment processing procedures and didn’t see anything out of the ordinary, until we reviewed their sales receipts. They had provided all the required information on the front of the receipts and the return policy was on the back of it, which is perfectly fine. However, there were two issues that we identified:

• The main problem was that the merchant had recently changed their return policy from unconditional credit (refund) to store credit and had failed to update the policy printed on the back of the transaction receipts.
• The other issue was that the merchant did not require customers to accept the terms of the credit policy by signing, or at least initialing, the back of the receipt.

Customers were right when they were requesting a full refund for returns, rather than a store credit, even though the latter was the merchant’s current policy.

The Credit Card Processing Takeaway

The merchant updated their receipts to reflect the current refund policy and customers are now required to acknowledge acceptance of the policy’s terms by initialing the back of the receipt. It’s been three months since then and they’ve only had one chargeback, caused by an unrelated issue.

So the problem was resolved, even though the merchant chose to ignore our suggestion and reinstate their unconditional credit policy, which we believe is the most customer-friendly one.

Take a look at your own policies and make sure they are up to date everywhere they are displayed. Then make sure that you require customers to agree to your policies, before completing a transaction. You just may spare yourself a headache down the road.

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