Inside the Black Hole

In the credit card processing world car rental companies are considered high risk merchants. The reasons are the usual ones: high rates of customer complaints, disputes and chargebacks. More often than not, the causes for customer discontent can be traced to improper payment processing procedures and poor customer service. Both of these can and should be remedied and in this article I will show you how to handle the credit card acceptance part.

Car Rental Credit Card Processing Procedures

Following are the most important aspects of the car rental credit card processing cycle:

1. Obtaining an authorization approval. You need to do that for all transactions, because the car rental floor limit is zero. U.S. merchants should use the $0 Account Number Verification Service if they want to verify that an account is in good standing, instead of a $1 authorization status check.

   
   Each authorization approval is valid for the estimated duration of the car rental period. If the rental period is extended, you will need to obtain an incremental authorization for the expected additional transaction amount.

2. Obtaining an incremental authorization approval. Follow standard authorization procedures to obtain an approval for the incremental amount. If you receive a decline, request that your customer use an alternative form of payment.

   
   If the car rental period extends for longer than two weeks, you need to settle the original transaction and obtain an authorization approval for whatever the estimated balance is.

3. Final authorization and 15% rule. When your customer returns the vehicle, the following authorization procedures should be implemented:
   1. If you had not previously obtained an authorization approval (which you should have done), authorize the total transaction amount.
   2. If an authorization approval was initially obtained, apply the “15% rule” to estimate whether or not an incremental authorization is needed. Here is how to do this:
      1. Add 15% to the original authorization amount.
      2. If the final transaction amount is greater than the sum you received above, an incremental authorization is needed for the difference between the initial authorization amount and the actual transaction amount.
4. Processing an authorization reversal. If the final transaction amount is lower than the initially authorized one, you need to process an authorization reversal for the difference.
5. Billing for additional charges. After a car is returned, you may discover that there are additional charges (for example, gas or mileage, traffic or parking violations, etc.) or calculation errors. You can bill your customer for these charges if your car rental agreement states that you can do it and your customer has agreed to it. Additional charges must be processed within 90 days of the vehicle’s return. Here is how to do it:
   1. Create a separate or amended car rental sales agreement for the additional charges, obtain an authorization for it and deposit it.
   2. Write “Signature on File” on the cardholder signature line, if using a separate agreement.
   3. Mail a copy of the agreement to your customer with a detailed explanation of the additional charges within 90 calendar days of the transaction date.

   
   The additional charges are the ones that are most likely to lead to a customer dispute, even if completely legitimate. You need to document them carefully and be ready to provide all requested documentation to your processor per request. For example, if a customer disputes a charge related to a parking ticket, you will need to produce the following information:

   • A copy of the car rental agreement.
   • Documentation from the authorities that issued the ticket.
   • The rental vehicle tag number.
   • The place, date and time of the violation.
   • The law that was violated.
   • The amount of the fine.

The Takeaway

The payment card industry is not going to change the high risk classification of car rental companies any time soon. However, if you implement the above guidelines in your credit card processing procedures, you will help maintain the good standing of your own company’s merchant account. You will still be getting customer disputes and will have to deal with the occasional chargeback, but it’s a numbers game. Your goal should be not to eliminate these, but to keep them to a minimum that both you and your processor can live with.

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).

For the most part, merchants don’t want to know much about how Visa’s transaction processing system works, or the equivalent system of any of Visa’s rivals, for that matter. As long as the customers’ cards can be accepted and the payments processed quickly and securely, most merchants are satisfied and perfectly happy to remain ignorant of what goes on behind the scenes to enable a transaction to be processed.

Now, I will not argue that this is wrong and that you should spend months educating yourself on the inner workings of Visa’s or MasterCard’s transaction processing systems. I am arguing, however, that there is a bare minimum of information that you need to know, so that when (and it is not if) something goes wrong, you will be better prepared to understand why and, possibly, to help resolve the issue.

Visa’s Transaction Processing System

VisaNet – Visa’s transaction processing system – connects the Visa payment network with Visa’s member bank’s systems and with other networks to facilitate transaction processing and other services. VisaNet transmits transaction information between processors and issuers and supports:

• Sales, cash, and bill payment transactions made with any Visa card.
• Recurring payments, as well as prepaid card transactions that allow partial authorization approvals.
• Travel and entertainment (T&E) card transactions.
• ATM transactions for other payment networks, which can also support the sale of dispensable products such as stamps and coupons.
• Private label and proprietary card transactions.

Support for these products outside of the U.S. can vary.

VisaNet’s Transaction Cycle

VisaNet processes qualifying transactions through its authorization, clearing, and settlement services, which are defined as follows:

• Authorization is the process that enables the card issuer to approve or decline a sales transaction before the sale is finalized or cash is disbursed.
• Clearing is the process of transmitting transaction information from the payment processor to the issuer to be then posted to the cardholder’s account.
• Settlement is the process of determining the exact amount of the funds that need to be exchanged between the processor and issuer that are parties of a cleared transaction. The actual exchange of these funds is a separate process.

Transactions can be authorized, cleared and settled using either single or dual messages, which are defined as follows:

• If using a single message, the transaction authorization request contains clearing and settlement data, in addition to authorization information. Typically, single-message (also called “full financial”) transactions are authorized and cleared online, but settled offline.
• If using a dual message, the transaction information is sent to VisaNet twice. At first only information needed for an authorization decision is transmitted, followed by a transmittal of information for clearing and settlement purposes. Typically, dual-message transactions are authorized online, but cleared and settled offline. Dual message processing is also known as “batch processing.”

If the final transaction amount is not known at the time of authorization, as is typically the case with transactions processed by hotels and by car rental agencies, as well as gas stations, single-message transactions can be processed much like dual-message ones. This is done through a process known as “deferred clearing,” where the authorization request is processed online, but the clearing and settlement are performed later (e.g. at the end of the day. Deferred clearing is only available for Visa point-of-sale and Electron transactions. An alternative to deferred clearing is the “Real-Time Clearing,” designed specifically for gas stations, where transactions are pre-authorized and processed immediately, rather than at the end of the day.

The Takeaway

It is important that you understand what takes place during the period between the swipe of your customer’s card and the deposit of the transaction amount into your bank account. If you invest the time to do so, you will be better able to ensure that your merchant account is set up in a way that best addresses your particular circumstances.

Alternatively, of course, you can just leave it all up to your processor and hope it does the right thing.

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.

There have been some changes in the MasterCard transaction process since we last examined it and a fresh overview is now in order. Moreover, there are some details that we neglected to include in our previous review of the MasterCard transaction cycle, so we needed to re-examine it anyway.

Keep in mind that, if you know how to accept MasterCard cards correctly, you will pretty much know how to accept all other payment cards correctly. There are some minor differences between the transaction cycles used by the major card companies (Discover and American Express) and Associations (Visa and MasterCard), which you definitely need to be aware of, but the essentials are the same. So let’s get started.

Participants in the MasterCard Transaction Cycle

There are several participants in each debit or credit card transaction:

• Cardholder. Cardholder is an authorized user of the card presented for payment.
• Merchant. Merchant is a business or non-profit entity that has entered into a merchant processing agreement with an acquirer, which authorizes it to accept cards and other electronic payment forms.
• Acquirer. Acquirer is short for acquiring bank (and is also known as merchant bank, processing bank or processor). It is a financial institution that is a member of MasterCard (and usually of Visa as well) that acquires transaction data from its merchant and submits it to the issuing banks for authorization. The acquirer also clears and settles transactions for exchanging funds between issuers and its merchants.
• Issuer. Issuer is short for card issuing bank. It is a member of MasterCard (and usually of Visa) that issues cards bearing MasterCard’s logo. Issuers approve or reject transaction authorization requests. They also bill cardholders and participate in the clearing and settlement processes.
• MasterCard. MasterCard is an association of member banks that licenses its brand to its members and processes payments between acquirers and issuers of MasterCard-branded cards.

MasterCard Transaction Cycle

Following are the stages of the transaction process.

• A card is presented for payment.
• Authentication. The merchant verifies the validity of the card and the cardholder. In a card-present setting, the merchant physically inspects the card for signs of alteration and can request a government-issued ID if in doubt about the cardholder’s authenticity. In a card-absent setting, there are many services that can assist merchants in the authentication process and we have reviewed them in multiple articles before.
• Authorization. In this stage the card issuer approves or rejects the transaction, based on the information provided by the merchant. The possible authorization responses are:
  • Approval – the merchant can proceed with the transaction.
  • Decline – the merchant should not complete the transaction and ask for an alternative payment method instead.
  • Refer to card issuer – the merchant should contact the issuer before completing the transaction.
  • Capture card – the merchant should retain the card.
  • Valid – used for inquiries (balance inquiries, address verification requests, etc.), this response indicates that the authorization request is not declined. In effect, it is an approval, however there is no actual transaction taking place.
  • Clearing and settlement. Although separate processes, the clearing and settlement occur simultaneously. Clearing is the process of exchanging transaction data between an acquirer and an issuer, while settlement is the process of exchanging funds between the two parties. In a typical card transaction, the issuer pays the acquirer the transaction amount, minus the applicable interchange fee. The acquirer then debits the merchant’s account with the amount of the settled funds, minus its own processing fees, which are stated in the merchant agreement.
  • Cardholder payment. The issuer, credits its cardholder’s account with the transaction amount. At the end of the month the cardholder makes a payment to the issuer to complete the transaction cycle.

The Takeaway

The merchant is actively taking part in the second and third stages of the transaction process: authentication and authorization. This is where you need to become an expert and it is not so difficult to do so. There are many resources to help you do that and you can find plenty of them on this blog.

If yours is a larger organization, write a policy on authenticating transactions and handling authorization responses. Then train every staff member involved in the sales process on the procedures they need to follow when processing payments. If you do a good job at it, you will see less authorization declines, customer disputes, chargebacks and fraudulent transactions. Which is what you want, right?

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.

It’s been a while since I’ve posted anything about a “game-changing” payment processing start-up and it isn’t due to the field getting any less crowded. Rather, I just haven’t come across anything worth writing about. Well, that changed this morning when I read a piece about Noca in TechCrunch (by the way, why do so many TechCrunch articles sound like press releases?), which prompted me to check out the company’s website.

There are several things that jumped out at me and none of them were good. I read some incredibly misleading statements coming from people who really should know better. Let me explain.

What Is Noca

Noca offers check and credit card acceptance services to web-based U.S. merchants. Check acceptance costs merchants 1.49 percent of the transaction amount, while the equivalent rate for credit cards is 3.49 percent. It isn’t explicitly stated, but it looks like Noca may only provide Visa and MasterCard acceptance.

When a customer selects the Noca payment option at the checkout, they can choose to store their credit card information with Noca, which would allow them to complete each subsequent transaction simply by entering a PIN.

What Stands Out (For All the Wrong Reasons)

The reason I went to Noca’s website was that the TechCrunch piece told me that they charge a hefty 3.5%. Not only is that correct, but Noca promises to “deliver substantial cost benefits.” Then there is this:

Noca has a new payment processing network that provides end-to-end payment settlement for a fraction of the cost of incumbent systems.

While the first part of this statement is true, the second is incorrect. In fact, Noca is, if anything, more expensive for merchants than the vast majority of credit card processing services that are currently available.

Then there is this:

It [Noca] decreases interchange (payment processing) costs to 0.99% and, combined with the reduction in chargeback costs, enables online merchants to get a significant competitive advantage.

Leaving aside the totally erroneous equation of interchange with payment processing fees, this statement is patently misleading. Interchange fees are set by Visa and MasterCard and neither Noca nor any other payment processor has any influence over them. Moreover, I have no idea where this 0.99 percent figure comes from (nor is an explanation even attempted).

The Takeaway

I really don’t know what to make of all this. I can’t think of another payment processor that is providing so much misleading information on its website. What makes things even more perplexing is the fact that Noca’s president (P. J. Gupta) is a former Visa executive who presumably should know that the claims his website is making are false. In fact, the latest post on his blog shows that he clearly does know what interchange is and who has control over it.

The thing is that, whatever Noca may choose to write on its website, the types of rates they charge speak for themselves and merchants can do the math. Noca’s pricing is simply not competitive.

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.

I’ve been quite ambivalent about writing this post, because I don’t think that what we recently went through during a failed bid for the business of a household-name global non-profit organization is by any means unique. It just didn’t seem as if there was anything new to be said about a process that countless other credit card processing companies have gone through and will do so in years to come. Yet, we learned a lesson or two from the experience and so may you, so here it is.

The Set-up

So a couple of months ago we were contacted by a Washington, DC-based consultant who stated that he was representing a non-profit organization that was looking for a new credit card processing provider. I ended up speaking with him and was quite impressed with how knowledgeable he was about our industry.

Now, I should digress a little and share with you that speaking with a prospective client who understands how the bank card industry works and especially the differences between the various pricing models is a quite rare occurrence. In fact, I can’t remember the last time it happened to me.

Anyway, no concrete details were disclosed during this initial conversation, so I didn’t know who the client was, nor did I know what their processing volumes were and quickly forgot about it.

A couple of weeks later I was contacted again by the consultant who now revealed the name of their client and emailed me a spec sheet with the details of their operations and requirements. His client was doing about 90,000 transactions a month, with an average ticket of $17.

The Client’s Predicament

The client of course was looking for lower rates, as everyone else does, but they also had a unique issue they needed to get resolved. About 90 percent of the client’s donations were collected monthly in recurring installments for a year. The problem was that 6 percent of the cards used in these recurring contracts became invalid at some stage of the 12-month donation cycle, which was costly for the client both because of the lost donation amount, but also because of the chargebacks they were incurring and the additional administrative expenses, associated with dealing with the issue.

One way to deal with this predicament, perhaps the most straightforward one, is to use the MasterCard and Visa card updater services, which automatically update the card information on file with participating merchants. These are designed specifically for dealing with card attrition in recurring payment arrangements and do a good job at keeping account information current.

The consultant had done his home work, so he knew about the updater services and was looking for a processor that supported them. In fact, he found us while educating himself on the subject and coming across an article on the two services on our blog.

Our Bid

We knew that we had to go very low with our proposal, if we stood any chance of winning the contract. So we did. To give you an idea of how low our bid was, all I need to tell you is that, if we had won it, our revenues from this account would have been equal to what we typically get from an account that is five times smaller. Of course our expenses would have been much higher in maintaining the larger account, so our profit would have been substantially lower.

On top of that, we proposed to pass the updater fees our acquiring bank charges on to the client without adding any surcharge, which meant that our revenues would consist exclusively of the processing fees.

The Outcome

To make a long story short, I was eventually contacted by the consultant and informed that someone else had won the contract. What was the winning bid? About half of what we had proposed!

Think about that for a second. The winning party will be processing the payments of a 90,000-transaction-per-month account and will probably be collecting revenues equal to what they would be getting from a 9,000-transaction-per-month one. When you consider the extra expenses for servicing the much bigger account, you are left wondering whether it is worth having such a client in the first place. In fact, I think that there is a strong probability that no profits will be made at all.

It turned out that the only thing that had kept us in the race was the very low card updater fees we had offered. I guess the other bidders had calculated that low-balling the headline rate could be at least partially offset by charging higher fees for the add-on services. Yet, this may turn out to be an error, as even before the decision was made, the consultant was already asking me if the account could be set up without the card updater (the answer is yes). And anyway, the updater would be used for only 6 percent of the accounts.

The Takeaway

I am now reminded of an advice given by a successful entrepreneur in an autobiographical book I read recently. He said that you should never participate in an auction, unless you are the one soliciting the offers. I think that is good advice.

Even if we had won the contract, I wonder if it would have been worth it. On paper, it does not make sense at all. The only thing we could have gotten out of it that a five times smaller account would not have given us would’ve been some extra publicity. We would have written papers and produced videos and other marketing material to tell everyone that we had been able to save a well-known non-profit organization a great deal of money. OK, but what would we have done when everyone who read the paper and saw the videos demanded the same low pricing? Would we want to be known as the cheapest processor there is? Would that be the way for us to go forward? I think we now know the answer to these questions.

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).