Credit Card Processing Blog

A recurring or installment payment plan exists when a series of charges, either of a fixed or variable amount, are paid over a period of time. With installment plans, the number of payments is fixed, while recurring plans exist indefinitely, until canceled by the consumer. Discover requires merchants that process installment and recurring payments to comply with the following requirements:

• Authorization. Discover requires merchants to obtain a separate, current authorization for each installment charged to a cardholder under a recurring or installment payment plan, before submitting the transaction for settlement. An authorization approval for one installment payment is not a guarantee that any future installment will be authorized.
• Cardholder’s approval. Merchants are required to obtain the cardholder’s written approval to charge their cards over the term of the recurring or installment payment plan. If approval is given over the internet, merchants need to retain some kind of electronic evidence. In any case, the approval must include all of the following information:
  • Cardholder’s name, address and account number.
  • Amount of each installment.
  • Timing or frequency of payments.
  • Length of time over which the cardholder permits you to bill installments to his or her card.
  • The merchant’s merchant number as assigned by Discover.
  • Card expiration date.
  • Dollar amount of the transaction, including tax and tip (dollars and cents).

  
  Merchants are required to retain evidence of the cardholder’s approval of the installment or recurring plan for at least the duration of the installment plan. If the plan is renewed, the merchant needs to obtain a new evidence of the cardholders approval.

• Submission of transaction data. Recurring and installment transactions should be submitted the way one-time transaction data is submitted. If the account is closed for whatever reason, the merchant needs to request an alternative form of payment from its customer.
• Fixed and variable payment plans. Whether a recurring or installment plan features installments of the same amount, or the amount of each installment in a recurring or installment plan varies, merchants are required to submit transaction information to Discover for each recurring or installment payment they accept. If a merchant wants to make any changes to a fixed or variable payment plan, it needs to contact Discover before making these changes.

For the most part, Discover recurring and installment payment plans need to comply with the same requirements as they would have to if the card was a Visa or a MasterCard. We have written in detail on managing the various aspects of such plans in previous posts and encourage you to review them.

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).

Another huge bank is teaming up with a giant credit card company to test a contactless payment system. This time it is the turn of Bank of America, the largest U.S. consumer bank, and Visa, the largest card payment network in the world, to unveil a program that would make it possible for customers to pay by waving their phones by a specially equipped point-of-sale (POS) terminal.

The test will begin in September in the New York area and will last through the end of the year. Visa also plans a similar test program with U.S. Bancorp, beginning in October.

Visa will supply participants in the test with small chips that would be attached to their cell phones and transmit transaction data to the merchant’s terminal. Although technical details were not released, it is likely that the chips will use near-field communication (NFC) frequency to communicate with the merchant’s POS device. The NFC frequency allows data transmission within a range of less than 20 cm (8 in), which limits the risk exposure to threats from hackers.

Once a user waves his chip-equipped phone by a participating merchant’s POS device, his account information will be transmitted first to Visa and from there to Bank of America for authorization. Then the transaction will be processed just as any other card payment. Upon approval, a receipt will be printed out for the cardholder to complete the transaction.

Contactless cell phone payments have been in use in Japan and South Korea for years, but they never made any headway in the U.S. This is certain to change, however, with most mobile phone carriers and major banks developing their systems.

Only a couple of weeks ago three major carriers – Verizon, AT&T and T-Mobile – announced they were teaming up with fourth-biggest U.S. card payment processor Discover and British Barclays Bank to develop their own contactless payment service, using NFC technology.

Earlier this year, Starbucks expanded its own iPhone mobile payment service, also using NFC technology, from 16 West Coast stores to more than 1,000 locations nationwide.

So it is clear that the U.S. is finally on its way to joining Japan and Korea in adopting the mobile payments technology and at the rate smart phones are evolving, we are likely to see much more innovations in a fairly short order. The day when most cardholders will have their credit card information stored in their phones, rather than in a piece of plastic, is probably just a few years away.

Yet, for all their convenience, mobile payments will not transform the credit card industry. Cell phones will simply become another tool for facilitating credit card payments, cooler than POS terminals, but performing the same functions. More importantly, transaction fees, paid by merchants for each card payment they accept, will either remain the same or increase. NFC-transmitted payments will initially be classified as “card-present” transactions, giving them the lowest processing rates, because cardholders will be signing physical receipts. That puts them on par with POS terminal-processed payments. However, if it turns out that mobile payments are more prone to fraud or chargebacks, Visa, MasterCard and the credit card companies are sure to revise this classification.

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Both Visa and MasterCard use special Reason Codes to designate chargebacks that result when a credit transaction is posted on a cardholder’s account as a debit (purchase). Visa uses Reason Code 76 and its MasterCard’s equivalent in 4850.

What causes these chargebacks? Card issuers use Reason Codes 76 and 4850 when one of the following two conditions are met:

• A debit (charge) has been inaccurately posted on a cardholder’s account, instead of a credit (refund), as a result of an incorrect transaction code or keying error. For example, the merchant posted a credit as a retail sale.
• The chargeback amount is twice the original transaction amount to offset the original error. The issuer should then correctly credit the cardholder’s account.

However, an issuer cannot use these Reason Codes when a retail sale is processed as a cash disbursement.

The time frame to respond to Reason Codes 76 and 4850 is 120 days.

How to manage such chargebacks? Your response to chargeback Reason Codes 76 and 4850 will depend on the particular transaction circumstances and the actions you have taken (or not) so far:

• The correct transaction code was posted. If the transaction was posted correctly as a credit, provide your processing bank with supporting evidence to show that the transaction was posted correctly as a credit to the cardholder’s account.
• The credit was posted as a debit. If the transaction was posted mistakenly as a debit, there is no remedy and you should accept the chargeback. Do not issue a credit at this time, as the chargeback has already done that for you.
• The chargeback is invalid. If the original transaction was processed correctly as a sale, a copy of the sales receipt may be required as proof of the retail sale, instead of a credit.

How to prevent chargeback Reason Codes 76 and 4850? Preventing this type of chargebacks is entirely within your control and has more to do with your internal card processing procedures than with anything else. In particular, you should:

• Pay attention and use the correct transaction code. Predictably, the best preventive measure against this type of chargebacks is for the point-of-sale staff to make sure that a credit transaction is posted just as such, using the right code.
• Provide training. It is up to the senior management of your organization to make sure that the point-of-sale staff is adequately trained on the correct use of transaction codes to ensure proper credit and debit processing.

It is perhaps inevitable that you will see a chargeback Reason Code 76 or 4850, even if you apply the above preventive measures. However, this should be an exception and you should follow up immediately with the responsible employee and make sure that they understand what took place and how to prevent it from reoccurring.

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).

Yesterday we reviewed MasterCard’s Chargeback Reason Codes and today we will do the same for Visa’s. Reason Codes are two-digit (for Visa) or four-digit (for MasterCard) numbers that the two credit card networks use to identify the reason an issuer is disputing the validity of a particular transaction.

Visa’s chargeback reasons are organized into six general groups:

1. Non-receipt of information.
2. Fraud.
3. Authorization error.
4. Processing error.
5. Canceled / returned merchandise.
6. Non-receipt of goods or services.

The following tables list Visa’s Reason Codes and time limits for processing a chargeback.

1. Non-receipt of information chargeback reasons.
   
   

   Non-Receipt of Information Chargeback Reasons	Reason Code	Time Limit (Calendar Days)
   Requested Copy Illegible or Invalid	60	7
   Cardholder Does Not Recognize Transaction	75	120
   Requested Transaction Information Not Received	79	7

   
   Except for Reason Code 75, the time limit is calculated from one of the following:

   • The date the issuer received the illegible transaction receipt or invalid fulfillment.
   • The date the issuer received an applicable non-fulfillment message.
   • The date following the 30-calendar-day waiting period.
2. Fraud chargeback reasons.
   
   

   Fraud Chargeback Reasons	Reason Code	Time Limit (Calendar Days)
   Fraudulent Multiple Transactions	57	120
   Counterfeit Transaction	62	120
   Fraudulent Transaction – Card Present Environment	81	120
   Fraudulent Transaction – Card-Absent Environment	83	120




3. Authorization error chargeback reasons.
   
   

   Authorization Error Chargeback Reasons	Reason Code	Time Limit (Calendar Days)
   Declined Authorization	71	75
   No Authorization	72	75
   Expired Card	73	75
   Non-Matching Account Number	77	75




4. Processing error chargeback reasons.
   
   

   Processing Error Chargeback Reasons	Reason Code	Time Limit (Calendar Days)
   Late Presentment	74	120
   Incorrect Transaction Code	76	120
   Incorrect Transaction Amount or Account Number	80	120
   Duplicate Processing	82	120
   Paid by Other Means	86	120
   Transaction Exceeds Limited Amount	96	75




5. Canceled / returned chargeback reasons.
   
   

   Canceled / Returned Chargeback Reasons	Reason Code	Time Limit (Calendar Days)
   Canceled Recurring Transaction	41	120
   Not as Described or Defective Merchandise	53	120
   Credit Not Processed	85	120




6. Non-receipt of goods or services chargeback reasons.
   
   

   Non-Receipt of Goods or Services Chargeback Reasons	Reason Code	Time Limit (Calendar Days)
   Services Not Provided or Merchandise Not Received	30	120
   Services Not Rendered – ATM or Visa TravelMoney Program Transactions	90	120

Each Reason Code identifies a chargeback caused by a specific issue that needs to be remedied individually. We have already reviewed in previous posts some of the Reason Codes mentioned above and have suggested ways to prevent or minimize them. We will do the same for the rest in the coming weeks.

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).

Often, when we receive a merchant account application, the applicant leaves the field for the “annual credit card volume” and “average credit card ticket” blank. Typically, the omission is made by an applicant with no previous processing experience, but it is not rare that a merchant with an existing merchant account fails to provide its processing volumes or average ticket. But why is this field included in the application in the first place and what should you answer if your business is new and you have no idea how much revenue it will bring in the first week, never mind the first year?

In order to answer this question, we will first have to look at the application process through the eyes of the underwriter, i.e. the processing bank. From your processor’s perspective, you are applying for a line of credit. This is often difficult for merchants to understand, because, from their stand point, a merchant account has nothing to do with extending any credit. Well, this is not exactly so, even though it is true that typically the processor gets paid before it pays the merchant (after subtracting its processing fee from the transaction amount). The problem processors are faced with is that fraudulent and other invalid transactions can be charged back, i.e. reversed, up to 180 days after the transaction date. If it is still operating, the merchant will bear the liability for these transactions. However, if the merchant has closed down shop or if its merchant account has been terminated (which can happen for any number of reasons), the processor will bear the liabilities.

One of the processor’s major objectives when evaluating a merchant account application is to estimate its own potential liability and to do that, a key piece of data each credit manager relies on is the merchant’s expected annual credit card volume. After all, the processor’s liability cannot exceed the total amount processed by the merchant.

It should be emphasized here that, provided you keep your merchant account in good standing, you will be allowed to accept credit card payments, even if you exceed your stated annual processing volume. Issues are certain to arise, however, if your track record is less than perfect, in which case your account may be frozen.

Moreover, all underwriters set an annual volume threshold, which varies by processor, but is typically around $450,000. All applications that list processing volumes above the threshold are automatically subjected to a more rigorous examination and applicants may be required to provide additional supporting documentation.

Of course, there are other risk factors that come into play and they are taken into account as well. For example, some industries are typically prone to higher levels of chargebacks. Prime examples are adult-oriented websites, third party collection agencies, used car dealerships, etc.

Certain factors, however, go across industry lines and the average sale’s amount is among the more important ones. The reason is that the bigger the average sale’s ticket, the bigger the potential chargeback or fraud liability. Even if sales take place in a face-to-face environment and the potential for fraud is minimal, consumers are much more likely to have a change of heart and dispute a $1,500 purchase than a $10 one.

Now that you understand what your prospective processor’s priorities are when evaluating a merchant account application, what should you enter in those two fields? First and foremost, you should try to be as accurate as possible. If you have been in business for some time and are looking to switch processors, this should not be an issue. For new merchants, unless you are absolutely certain that your sales will exceed the annual volume threshold mentioned above, provide a figure that is below $450,000. As the year progresses, you can request an update, if necessary.

Regarding your average credit card ticket, you should provide a figure at the higher end of the expected range. For example, if your sales will range from $50 to $500, enter $450. Your processor will not mind seeing sales in lower amounts than the stated one, but higher-amount sales will be raising red flags, especially if processed on a consistent basis. The reason again has to do with fraud and liability. A fraudulent transaction is much more likely to be for a large amount than a small one.

With all that in mind, you know your business better than anyone and should be able to provide a fairly good estimate of your expected sales amounts. When in doubt, it is better to state a figure closer to the higher end of your estimates than to the lower one.

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).