Inside the Black Hole

In most credit and debit card transactions the card is only presented for payment once the exact purchase amount is calculated. Then an authorization request is sent to the issuer for the transaction amount, an approval or decline is issued and the transaction process follows its regular course.

But what about transactions, such as fuel sales at gas stations, where the exact purchase amount is unknown at the time the card is swiped? This is where merchants use pre-authorizations to ensure there are sufficient funds on the card to pay for the fuel.

What Is Pre-authorization

Pre-authorization is a transaction authorization request for a pre-determined amount that is sent to the issuer before the final transaction amount is known. Used mainly at unattended point-of-sale (POS) terminals at gas stations, pre-authorizations enable merchants to check the availability of funds on their customers’ cards.

The pre-authorization amount is set by the merchant and can be $50, $75, $100 or more and is displayed on some POS terminals’ screens (you should be doing that too, if you aren’t doing it already). There is a maximum pre-authorization amount that is set on an acquirer level, based on merchant category and other factors, and that could be stated in your merchant processing agreement. If not, call your acquirer and ask what it is.

How Pre-authorizations Are Processed

There are two ways of processing pre-authorization requests:

• Using an authorization message that is followed by a partial reversal once the transaction is completed. In this case, after the customer swipes her card, an authorization request is sent to the issuer for a fixed amount (this is the maximum pre-authorization amount). Then, once the purchase is finalized and when the exact sale’s amount is known, a partial reversal is issued to correct the previously authorized amount.
• Using an authorization message that is followed by the sending of the exact sale’s amount in the clearing record. In this case, once the customer swipes her card, an authorization request is sent to the issuer for the maximum pre-authorization amount. What you need to be aware of here is that your customer’s credit line is reduced by the sum of the pre-authorization request and the exact transaction amount.

So let’s say that your customer has a $2,000 credit line on her card and has used $1,700 of it. If you process a $50 pre-authorization amount and then the customer purchases $50 worth of gas, the card’s available balance will be $200 ($2,000 – $50 – $50). The pre-authorization amount typically takes no more than a couple of days to be removed.

In both cases the transaction must be cleared within seven business days.

It should be noted that authorization requests for hotel or resort transactions are different from regular pre-authorizations, even though you can see them referred to as such. For one thing, there are no pre-set pre-authorization amounts for hotel transactions. The hotel will request an authorization approval for the entire estimated transaction amount, whatever it may be. Once the customer checks out, a partial authorization reversal will be requested if the initially authorized amount exceeds the final amount or an authorization approval will be requested for the amount above the originally approved one, if that is the case.

The Takeaway

If you own a gas station, you need to make sure that you understand how pre-authorizations work. Also, you need to make sure that your maximum pre-authorization amount is set high enough, so that not to inconvenience your customers.

I’ve never had any issues getting gas for any amount here in Boston, but I do remember that, while on a cross-country trip a few years ago, I could only get up to $50 in gas at some stations. I was driving a truck so that wasn’t nearly enough. Now, that’s a sure way to chase all truck drivers away from your gas station so don’t do it.

Get a personalized credit card rate for each of your transactions!

Get the lowest possible credit card processing rate for each individual transaction! Our interchange-plus pricing model gives you:

• Processing rates calculated separately for each transaction to ensure that not a single one of them is overcharged.
• No more mid-qualified and non-qualified fees.
• No fixed monthly fees.

Most hotels are now using the Express Checkout service that allows customers to check out of their rooms and return the keys, without actually having to wait for their final bill to be produced. It is a great convenience for hotel guests at all times, but especially so when they are pressed for time, which is often the case with many of us.

If you aren’t using the service at your hotel, you should start doing it. In this post I will review how the program works and what procedures need to be followed by participating merchants.

How to Use Express Checkout

Express Checkout works by allowing participating hotels to finalize the bill after the guest checks out. The following procedures should be followed.

1. At check-in, ask your guest if they would like to use the Express Checkout service or include the Express Checkout Authorization Form in your guest’s “welcome package.” Not everyone will agree to using the Express Checkout, as they will want to examine the bill first.
2. Have each customer who agrees to use the service to fill out and sign the Express Checkout Authorization Form, which should include your hotel’s name, address, and phone number and provide space for the customer’s name, address, room number, signature, and account number that may optionally be imprinted.
3. Explain to your customer, and spell it out in the authorization form, that the final bill will be charged on his or her card account, without the need for a cardholder signature at checkout.
4. Request a pre-authorization approval for the expected amount of the bill. If your authorization request is declined, ask your customer for an alternative form of payment.
5. Once you have obtained an authorization approval, print out a sales ticket with your customer’s card account number, and follow regular authorization procedures. Write down the words “Express Checkout” on the ticket and once again explain that the bill amount will be charged on the card after the customer checks out.
6. When your customer leaves, you need to calculate the final bill amount and complete a sales ticket, printing the words “signature on file – express checkout” in the customer signature field.
7. If the final bill exceeds the pre-authorized amount by more than 15 percent, request an authorization approval for the additional amount.
8. Deposit the sales ticket in the usual manner.
9. Mail or email a copy of the bill, sales ticket and the Express Checkout Authorization Form to your customer no more than three business days after he or she has checked out.
10. Keep copies of the bill, sales ticket and authorization form for at least 18 months to be used in the event of a dispute.

The Takeaway

Express Checkout is an incredibly consumer-friendly program and you should take advantage of it to help make your guests’ stay at your hotel as pleasant as it can be. In fact, the service offers convenience to hotel employees as well, as it allows them to choose the best time to finalize a bill. Just follow the above step-by-step procedures and you will be sure to do it the right way every time.

Get a personalized credit card rate for each of your transactions!

Get the lowest possible credit card processing rate for each individual transaction! Our interchange-plus pricing model gives you:

• Processing rates calculated separately for each transaction to ensure that not a single one of them is overcharged.
• No more mid-qualified and non-qualified fees.
• No fixed monthly fees.

Lodging merchants, such as hotels, motels and resorts, are classified as high risk by Visa and MasterCard and often have hard time setting up a merchant account on regular terms. This is particularly true for new establishments, with no previous payment processing experience. The reason, as always, is that historically lodging merchants have generated higher-than-average levels of chargebacks.

There is a set of rules regulating the processing of credit card payments each time a lodging reservation is made or cancelled. If you manage a hotel, motel or a resort, you need to incorporate these rules into your payment processing procedures and train your staff on implementing them.

Guaranteed Reservations

The rules for processing credit card payments at hotels revolve around the Guaranteed Reservation program most such merchants typically participate in. Guaranteed reservation is one that is paid in advance and the hotel is then required to have a room available when the consumer who made the reservation arrives and until checkout time on the following day.

If the consumer cancels a confirmed reservation before 18:00 on the arrival date, the hotel cannot charge a no-show fee. Otherwise, a no-show charge equal to one night’s lodging can be assessed.

How to Manage Credit Card Payments for Guaranteed Reservations

The following procedures should be followed when processing credit card payments for guaranteed reservations:

1. When a consumer requests to book a room with a credit or debit card, you must explain the terms of the guaranteed reservations program, and specifically provide the following information:
   1. An authorization check will be made when the consumer arrives to ensure that there are sufficient funds on the card to cover the lodging expenses. The check acts like a pre-authorization, which places a hold on a portion of the available credit line.
   2. The cancellation procedures that must be followed for a no-show charge to be avoided.
2. Take the consumer’s card account information and confirm the room rate and location. Then provide a reservation confirmation number. If the reservation is made by phone, you should also provide the confirmation number and cancellation procedures in writing (via email).
3. If a cancellation request is made in accordance with you stated policy, you must honor it and provide the consumer with a cancellation number.
4. Prepare a registration card and assign a room number to it, before your customer’s expected arrival.
5. When a consumer who has made a reservation arrives on the specified date, you must provide a room as agreed. If you are unable to do that, you must provide a comparable room for one night at a different location and at no additional charge, as well as transportation to the other location and a three-minute domestic or long distance phone call.
6. If you receive no cancellation request and the consumer who made the reservation does not stay at your hotel, you can assess a no-show charge by following these following procedures:
   1. Complete the transaction, as you normally would, and write the words “guaranteed reservation / no-show” in the cardholder signature field.
   2. Follow regular authorization procedures.
   3. If an authorization approval is received, deposit the no-show charge.
   4. Store the actual no-show registration card for six months from the date the transaction is deposited.

Everyone in your organization who works at the check-in or takes phone calls from customers should be able to follow these procedures.

The Takeaway

No-show charges are the primary reason hotels fall into the high risk credit card processing category and you will never be able to completely preclude disputes stemming from them. This is why it is very important that you keep detailed records of all of your no-show charges and are able to quickly respond to all transaction copy requests and so prevent chargebacks.

Get a personalized credit card rate for each of your transactions!

Get the lowest possible credit card processing rate for each individual transaction! Our interchange-plus pricing model gives you:

• Processing rates calculated separately for each transaction to ensure that not a single one of them is overcharged.
• No more mid-qualified and non-qualified fees.
• No fixed monthly fees.

If you have followed our suggestions, by the time you have received an authorization approval for a credit card transaction, you would have examined the card and confirmed that it has not been tampered with and it is valid. So far, so good, but you are not done yet and should not be lowering your guard.

The next step is to have the customer sign the transaction receipt and to compare that signature with the one on the back of the card. You need to make sure that the two match and that your customer is an authorized user of the card, before you complete the transaction. Here is how to do that.

Obtaining and Matching the Signature

When your customer is signing the receipt, he or she should be within your view, and you should carefully compare the signature to the one on the card for any obvious mismatches in spelling or handwriting. “Carefully” does not mean lengthy and it typically takes a trained person a couple of seconds, so you shouldn’t be concerned about having your employees spend too much time comparing signatures and annoying customers in the process. If you train them adequately, there will be no downside.

The first initial and the spelling of the surname must be identical. The signatures should not be considered to be matching if, say, the signature panel were signed “Kevin D. Jones” and the sales receipt – “Michael Jones” or “R. Jones.” The signature would be acceptable if signed “Kevin D. Jones,” “K. D. Jones” or “Kevin Jones.” The presence or absence of a title such as Mr., Mrs., or Dr. is irrelevant, as far as the validation process is concerned. Be advised that the name on the front of the card and the signature do not need to be the same.

In addition to the signature, you should also compare the name and last four digits of the account number on the card to those on the sales receipt.

If the signatures do not match, you should make a Code 10 call to your processor and follow the instructions of the issuer’s representative, with whom you will eventually speak. Keep in mind that your business will be held liable for fraudulent transactions that are processed with a non-matching signature, even if you followed all other procedures.

What If the Card Is Unsigned?

Unsigned cards are considered invalid and must not be accepted. If a customer presents an unsigned card for payment, you should do the following:

• Ask the customer for a driver’s license or another form of government-issued ID. Check the ID to make sure the customer is an authorized user of the card.
• Ask the customer to sign the card. If the he or she refuses, you should not accept it, but ask for a different form of payment instead.
• Compare the signature to the one on the ID.

If you accept an unsigned card for payment, you will be held liable if the transaction results in a customer dispute or if it turns out to be fraudulent.

What If the Signature Panel Reads “Ask for ID”?

Sometimes you will see the words “See ID” or “Ask for ID” or something similar written in the signature panel of the card. Cardholders who do that believe that, by hiding their signature, they prevent criminals from forging it. Of course most criminals typically rely on the merchant not looking at the back of the card to compare signatures or they may have produced a counterfeit ID with a signature in their own handwriting.

In any event, “See ID,” “Ask for ID” or anything else other than the cardholder’s signature written in the signature panel, renders the card invalid. If that is the case, you should ask your customer to sign the card and follow the above procedures.

The Takeaway

You should never accept cards where the signature is not matching the one on the sales receipt or is missing altogether. If you do that, you leave yourself vulnerable to any financial losses resulting from the potential fraud you may inadvertently be facilitating.

Train everyone manning the registers how to validate signatures and how to make a Code 10 call if there is a mismatch. They should then follow the instructions on how to proceed with the transaction.

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).

Businesses that accept credit cards in a face-to-face environment benefit from the lower interchange rates at which Visa and MasterCard process card-present transactions. Or at least they should benefit from these rates, unless what their processors are charging them makes up for the lower interchange.

However, in order for a credit card transaction to be classified as “card-present,” one of the qualifications is that it must be swiped. So, even if both the card and the cardholder are physically present throughout the transaction, if the payment information is key-entered, rather than “read” by the point-of-sale (POS) terminal from the card’s magnetic stripe, the transaction is classified as a “card-not-present” one. You will want to keep card-not-present transactions to a minimum, because they are processed at higher rates.

Card-Present vs. Card-not-Present Interchange

To be more specific, I have listed in the table below the interchange rates for some of the most widely processed types of credit card transactions in both environments.

As you see, there is quite a bit of a difference between the interchange of card-present and card-not-present transactions. Now, if you accept payments online or over the phone, you don’t need to worry about that, as you will never qualify for the lower interchange anyway. However, this is not the case if you accept credit cards through a POS terminal.

Why You Should Avoid Key-Entered Transactions

Any time you manually key-enter transaction information into your system, you are charged card-not-present interchange. In fact, if your pricing is based on a tiered model, the rate difference will be even bigger than what you see in the table above, because key-entered transactions will be classified as “non-qualified” and processed at a substantial premium.

At times you will have no choice but to key-enter a payment. For example, if your terminal’s card reader is malfunctioning or the card’s magnetic stripe is damaged, you will probably have to manually enter the transaction information. Keep in mind, however, that if the card itself is unreadable, this reason may be that the card has been altered and is invalid or counterfeit. In other words, your customer may be committing fraud.

Processing Key-Entered Transactions

Whenever your POS terminal cannot read a card, follow these steps to complete the transaction:

1. Check the terminal. See if the terminal is working properly. If it is, check the card.
2. Check the account number. The last four digits of the account number on the front of the card must match the four digits in the signature panel on the back of the card, right before the security code.
3. Check the expiration date. A bank card is only valid when it is used before the expiration date listed on its front.
4. Manually enter the transaction information. If you have discovered no reason to suspect foul play, key-enter the information.
5. Make an imprint of the card. You need to keep a manual imprinter handy for such circumstances.
6. Obtain a signature. Your customer must sign the transaction receipt.
7. Compare the signatures. The signature on the sales receipt must match the one on the back of the card. Unsigned cards are invalid and should not be accepted.

If, however, the card looks as if it has been altered in some way or the signatures don’t match or something else leads you to suspect that a fraudulent transaction may be under way, you need to make a Code 10 call. You will be connected with the card issuer’s authorization center and given instructions on how to proceed with the transaction.

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).