Credit Card Processing Blog

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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The Nevada Senate is well on its way to passing a bill that would be collecting $400,000 from taxi companies operating in Clark County, which includes Las Vegas, every six months, Las Vegas Sun’s Cy Ryan tells us. Clark County cab companies are being penalized for charging a $3 fee to customers who pay their fare by a credit or debit card.

The Nevada cab industry is only the latest one to stir a credit card trouble. What is with cabbies and credit cards?

Cab Drivers Hate Credit Cards

That much we do know. Here in Boston taxi owners sued the city last year for $1 million over the rules regulating the operational status of point-of-sale (POS) terminals inside the cabs. Drivers were not allowed to operate their cabs when the credit card machine was down.

In fact, cabbies have long resisted having to take credit cards in the first place. Amazingly, it was not until three years ago when New York taxis were ordered to place credit card terminals in their cabs. I don’t think legislators should have involved themselves, but think about that for a second; well into the 21^st century you could only pay cash for your cab ride!

Anyway, later there were reports that credit card payments actually led to higher tips for cab drivers, however that did not put a stop to their constant grumbles. In fact, quite apart from the constant grumbling, NYC cabbies resorted to “adjusting” the tip option on the terminal’s screen to show the 20 percent as the lowest available choice and the 30 percent one listed as a “reasonable” one.

Why Do Cab Drivers Hate Credit Cards?

This is all a bit bemusing. After all, all other consumer-oriented industries have long ago accepted credit card fees as cost of doing business and moved on. Or at least I cannot think of another one. What makes taxis any different?

I asked a cab driver some time ago what he thought about credit card payments, even though I knew perfectly well how he felt about them. Still, his answer did offer an insight. He said that the main issue was that he had to pay the cab owner at the end of each day, whereas he had to wait a few days to collect his credit card receivables.

Of course, processing fees are an often-cited issue as well. San Francisco taxi drivers, for example, protested earlier this month against a 5 percent fee they were being charged for accepting credit cards. The issue in this case, however, lies with the cab companies, not with the payment processors who charge much less than 2 percent for credit cards and even less for debit. So to a large degree this is a case of self-inflicted pain.

The Takeaway

The way I see it, taxi companies are just stuck in the past, stubbornly refusing to enter the present. Credit cards are here to stay and now, with all of the new mobile payments technologies being rolled out left and right, card acceptance is becoming easier than ever. Moreover, customers demand it. I, for one, use my card everywhere I can, because it is convenient, pays me back and because I don’t have to deal with cash and especially coins. I have no intention to quit paying my cab fares by card anytime soon.

That said, what Nevada’s Senate is doing is wrong. Private businesses should be allowed to charge whatever they please for the services they provide and it should be up to consumers to accept it or not.

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).

Quite a bit, according to a paper published by University of California – San Diego researchers. The scientists dig deep into the origin of spam and conclude that behind the vast majority of emails offering you cheap Viagra, Rolex watches, Gucci handbags, etc. are only a handful of suppliers and payment processors.

3 Banks Process 95% of Spam-Related Payments

Amazingly, the study finds that 95 percent of all spam-related credit card transactions are processed by only three banks, based in Azerbaijan, St. Kitts and Nevis and Latvia. Moreover, spam processors tend to specialize in specific niches. According to the paper:

In particular, most herbal and replica purchases cleared through the same bank in St. Kitts (a by-product of ZedCash’s dominance of this market, as per the previous discussion), while most pharmaceutical affiliate programs used two banks (in Azerbaijan and Latvia), and software was handled entirely by two banks (in Latvia and Russia).

Tellingly, most, but not all, processors are located in places with lax regulation.

‘Most’ Spam Transactions Coded Correctly

The researchers then methodically go over the transaction classification used by the processors of spam payments:

Each payment transaction also includes a standardized “Merchant Category Code” (MCC) indicating the type of goods or services being offered [52]. Interestingly, most affiliate program transactions appear to be coded correctly.

The reason why the scientists find the correct transaction classification interesting is that Visa and MasterCard usually clamp down real hard on banks facilitating such high risk transactions. Of course some processors are trying to disguise the real nature of spam transactions:

[A]nd finally Greenline which is the sole pharmaceutical affiliate program that cleared transactions through a US Bank during our study (completely miscoded as 5732, Electronic Sales, across multiple purchases). The latter two cases suggest that some minor programs with less reliable payment relationships do try to hide the nature of their transactions, but generally speaking, category coding is correct. A key reason for this may be the substantial fines imposed by Visa on acquirers when miscoded merchant accounts are discovered “laundering” high-risk goods.

There you have it. My educated guess is that it is not the bank who is misbehaving in this instance, but rather a sales agent or an Independent Sales Organization (ISO) whose acquirer is this particular bank. Such organizations solicit merchants for their acquirer who underwrites the merchant account. However, the intermediary is the one who communicates directly with the merchant and may suggest that the latter “adjust” their line of business in the application paperwork to make it easier to approve. Eventually, the bank will find out what is going on and terminate the account. There are just too many things that can go wrong with such a scheme for it to be successful in the long run. Or at least that is the case here in the U.S.

Infrastructure involved in a single URL's value chain, including advertisement, click support and realization steps. Source: UCSD.

The Conclusion: Payment Processing Most Valuable Spam Asset

The researchers consider several options for disrupting the spam ecosystem, including suspending offending domains by the registrar or hosting provider, but conclude that:

[T]he payment tier is by far the most concentrated and valuable asset in the spam ecosystem, and one for which there may be a truly effective intervention through public policy action in Western countries.

More specifically, the paper suggests two policy approaches for cutting off the spam transaction cycle. The first option is for acquirers to terminate offending merchant accounts. However, as the scientists themselves acknowledge, this can be difficult to accomplish, as such merchants register their payment accounts in countries like Azerbaijan for a reason. Still, Visa and MasterCard can easily force member banks to stop processing spam payments.

The second option suggested by the report is to have spam payments rejected by the card issuers. The declines would be triggered by indicators such as specific MCC transaction codes and processing banks (presumably located in places like St. Kitts, Latvia, Azerbaijan, etc.). This approach would be much more difficult to implement than the first one. I just don’t see Visa or MasterCard imposing restrictions on the types of transactions a specific member bank is allowed to participate in. Issuers cannot make such decisions on their own, so if such a black list is to be created, it would have to be the doing of a governmental regulatory agency. Well, spam emails just don’t strike me as the type of issue likely to capture the collective imagination of financial regulators right now. I guess we will have to keep marveling at the incredible Viagra promotions for some time to come.

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).

Many tricks have been devised to enable merchants accepting credit card payments get around one inconvenient industry rule or other. More often than not such tricks have backfired, rather quickly getting the offenders in trouble, but even so merchants have never lost their appetite for them. One of the most commonly used stratagems is the splitting of credit card sales amounts.

Splitting of Credit Card Transactions

A credit card sale is split when a merchant initiates two or more sales drafts for a single transaction, requesting multiple authorizations from the card issuer in the process. The reason for doing so is to avoid authorization limits outlined in the merchant agreement. By dividing the transaction amount among two or more sales drafts, the merchant ensures that each one falls under the authorization limit, thus solving the problem. This practice is explicitly forbidden and I would strongly recommend that you avoid it. There are simpler solutions to the authorization limit issue and I have suggested a couple of them below.

Split Tender Transactions

Firstly, not all split transactions are illegal. Merchants are allowed to process split tender transactions, even though these too involve two or more forms of payment for a single sale. There is a difference, though. Credit card companies typically allow holders of gift and prepaid cards to request split tender transactions, where the customer can use the card with another form of payment. The reason split tender transactions are allowed is that gift and prepaid card limits cannot be overdrawn. At the same time the cardholder must be allowed to spend the full balance of the card, preferably with as little inconvenience as possible. By contrast, credit and debit card accounts are much more flexible in that respect.

Why Are Split Transactions Prohibited?

There are no other exceptions to the rule and if you find yourself dealing often with high authorization amounts, you will have to look for a permanent solution to the issue. But first you need to understand why authorization limits are enforced in the first place.

Authorization limits play an important role in most processors’ fraud prevention strategies and are based on your average transaction amount. So if you average sale is $20, you will typically have no problem authorizing payment amounts of, say $30 or $40. However, if you try to authorize a transaction of $500, this would immediately, and understandably, raise a red flag. It just doesn’t fit your processing profile.

On the other hand, it would make a perfect sense for a criminal who has managed to take control over your merchant account to try and maximize his profits as quickly as possible, before the break-in is discovered.

How to Resolve the Issue?

The best solution to issues with authorization limits is to speak with your processor about it. Rather than trying to circumvent a perfectly sensible rule and placing the good standing of your merchant account at risk, explain your predicament to your processor. Chances are that your authorization limit was set too low and needs to be raised.

We have done it at UniBul Merchant Services on many occasions, most often for merchants with no previous credit card processing experience, who gave us an estimate of their average sale’s amount that was simply way too low.

There are merchants, however, whose sales amounts may range quite widely. In such cases we recommend that, when applying for a merchant account, rather than giving your processor an estimate of an average or median sale’s amount, you provide instead a figure that is closer to the highest end of your range than it is to the lowest.

In general, when you have a credit card processing issue, always try to first find a resolution with your processor before looking elsewhere.

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We have written at length about best practices on verifying the validity of the card and the cardholder, as well as the authorization of the payment in other posts. In this one I will go over the final three stages of the transaction process: the submission, clearing and settlement of the transaction.

The diagram below represents the stages of the credit card transaction process:

Transaction Submission

Credit card payments are not completed until the transaction information is submitted to the processing bank. Typically transactions are submitted electronically and all point-of-sale (POS) and virtual payment processing systems are programmed to automatically do that at pre-defined intervals, usually at the end of the business day. Exceptions are made for merchants who cannot connect to the processor at the time of the transaction, for example taxis and limousine services, street fairs, etc. In such cases, merchants can submit their transactions on paper.

You should submit all payments accepted during a given day at the end of it, so that if for some reason one of them does not go through, you can contact the customer and request an alternative form of payment within no more than twenty-four hours of the transaction.

Clearing

Clearing is a process through which a card issuing bank exchanges transaction information with a processing bank and occurs simultaneously with the settlement. You don’t have any influence over it, once you have submitted your transactions. Clearing is only present in Visa and MasterCard transactions, as American Express and Discover are both issuers of the cards bearing their logos and processors of the payments made with them.

Settlement

Settlement is the exchange of funds between a card issuer and a processing bank to complete a cleared transaction and the reimbursement of a merchant for the amount of each card sale that has been submitted.

Merchant accounts are typically funded daily and the settlement total is calculated as from the face amount of the submitted charges are subtracted all applicable deductions, which may include the following:

• Discount fees. These are the fees your processor charges you for each card transaction. They are specified in your merchant agreement.
• Amounts you may owe to your processor.
• Any chargeback amounts.
• Any credit amounts you may have submitted.

Funding is typically done through ACH transfers into your designated bank account. Most processors can now fund your account as soon as on the day following the transaction, however time frames can vary.

There are two main payment options and yours should be specified in your merchant agreement. These are:

• Net pay – you are paid the full amount of the submitted charges minus the discount and other applicable amounts.
• Gross pay – you are paid the full amount of the submitted charges, and then a second adjustment is applied to deduct the discount and other applicable amounts.

Typically you have ninety days to dispute any errors regarding discount or other fees or payments for charges, credits or chargebacks. You should be reviewing your settlements daily, or at the very least you should be spending some time on your monthly statements, although errors are much more difficult to see there, especially for larger-volume merchants.

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