Inside the Black Hole

When Discover receives a complaint from a cardholder about a billing error or the quality of products or services purchased with one of their cards, Discover may return the sale to the merchant for repayment. These returned charges are called “chargebacks.” Discover can charge back transactions to merchants within 180 days of the processing date.

Immediate chargebacks. Certain transactions can be immediately charged back by Discover. Following is a list of these immediate chargebacks:

Pending chargebacks. In some cases, Discover notifies merchants of pending chargebacks. Merchants have 20 business days from the notice date to respond to such a notice, before Discover processes a chargeback. The 20-day notice period is given to merchants to try to resolve the dispute with their customer and avoid the chargeback. Following is a list of the reason codes for pending chargeback notices:

Reversal of chargebacks. If the merchant is unable to resolve a customer dispute within 90 days from the date of the chargeback, the merchant can request a chargeback reversal. Provided that applicable laws allow Discover to re-bill its cardholder, reversals can only be processed if the merchant provides new information about the transaction at issue that was not available at the time of the original chargeback.

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).

Discover’s ticket retrieval process is equivalent to what Visa calls copy requests: requests for information regarding a particular card transaction. These requests are typically initiated by cardholders who contact Discover to dispute or request clarification on a particular charge on their card accounts. Discover then contacts the merchant in writing and requests documentation regarding the transaction.

Once a request is received, the merchant has 20 business days to provide Discover with a copy of the sales receipt or a refund check. Discover can send the request by mail, email or by other electronic means. If the merchant does not respond within 20 business days, Discover may return the transaction to the merchant as a chargeback.

The sales receipt or a copy of it received by Discover is then sent to the cardholder for review or for identification of the card account number. Merchants can also provide a substitute transaction slip for some transactions, which needs to include the following information:

• The card account number.
• The cardholder name.
• The card expiration date.
• The transaction amount.
• The transaction date.
• The authorization code.
• The merchant name and location.
• A description of the merchandise / services.


For Mail Order / Telephone Order (MO / TO):

• The shipping address.


For transaction completed at self service terminals:

• The self service terminal locations code or city and state.


For transactions completed at an automated fuel dispenser:

• The service station identification number.
• The invoice number.

If any of the above items is missing, Discover can file a dispute, which can lead to a chargeback. A dispute can also be filed if the submitted copy of a sales receipt is illegible or incomplete. Such chargebacks are designated with code IC: “Requested Item Illegible Copy” and are equivalent to Visa’s Reason Code 60: “Requested Copy Illegible or Invalid.” Most of these chargebacks can be prevented by implementing the following simple measures:

• Do not reduce the size of the copies. All copies you make of transaction receipts should be the same size as the originals. Reduced size can produce images that are hard to read.
• Place your company’s logo where it will not obstruct the information. Make sure your company’s logo is printed on the sales receipt in a way that does not obstruct the transaction information.
• Change the printer’s ribbon regularly. Replacing the printer’s ribbon regularly will eliminate faded, hard-to-read sales receipts.
• Keep the top copy of the receipt. Keeping the top (white) copy of the sales receipt ensures better quality copies in the future. Give the colored copy to your customer.

For more on managing copy requests, review our previous article on the topic. Although it was written to address specifically Visa and MasterCard requests for information, the same general rules apply to Discover’s ticket retrievals.

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).

JPMorgan Chase is still considering the possibility of purchasing Discover Financial Services, according to Gordon Smith, CEO of Chase Card Services, as quoted by Reuters. However, such a move would be challenging, he conceded, because “executionally it’s very difficult – not impossible, but it’s something we can always think about.”

Chase is currently the biggest issuer of Visa credit cards, and one of the top MasterCard issuers. However, processing card payments through Visa’s and MasterCard’s payment systems means paying fees to the two networks and this is exactly what makes a possible acquisition of Discover so appealing to the issuer.

Visa and MasterCard are associations of banks that can both issue cards bearing the logos of the two networks and acquire (process) payments made with these cards.

Each participant in the payment process charges a fee. The issuer gets the biggest cut, on average about 75 percent of the total fee paid by the merchant. The processor gets most of the rest, while Visa and MasterCard charge about a tenth of a percent of each payment’s amount. However, the issuer also pays a fee for the right to issue Visa- and MasterCard-branded cards. For the time being, Chase is doing its best to keep these fees to a minimum. “What we’ve chosen to do is negotiate very aggressively with both Visa and MasterCard, and get very very good deals with them,” according to Smith.

Discover, however, does things differently. Like bigger rival American Express, it is a bank, not an association of member financial institutions, like Visa and MasterCard. Being a bank allows Discover to both issue its cards and process payments made with them through its own payment network. The payment process is much simpler and the costs are down. This is what makes this model so appealing to a giant card issuer like Chase, especially at times when tough regulations and challenging economic conditions are squeezing profits.

Discover Card was first introduced by Sears in 1985 and was a unit of Dean Witter, which merged with Morgan Stanley in 1997, according to Wikipedia. Discover was spun off by Morgan Stanley in 2007.

Discover Financial Services, like its rivals, suffered from record high consumer defaults last year, however its charge-off and delinquency rates have been steadily improving. Charge-offs are loans issuers do not expect to be repaid and write off their books as losses, typically at 180 days after the last payment on the account. The latest available data showed that Discover’s charge-off rate fell to 7.28 percent in July, from 8 percent in June. Its early-stage delinquencies – payments late by 30 days or more – fell to 4.7 percent in July from 4.8 percent in June, the seventh consecutive month of decline.

Accept card payments quickly and safely

Accept online payments via credit and debit cards and electronic checks at the lowest processing costs. You will get:

• Free merchant account and Authorize.Net gateway set-up.
• No monthly merchant account or gateway fees.

The settlement of a Discover transaction is the process by which Discover reimburses a merchant for the amount of each card sale that the merchant has submitted. The settlement total is the sum of the following items submitted by the merchant:

• Purchases made in the form of card sales.
• Minus credits issued to Discover cards.
• Plus or minus adjustments made by Discover to reconcile or correct errors in your transaction data. All debit (chargebacks, adjustments, and discount) activity aside from credits is invoiced at the end of the month and is not deducted from the settlement amount.
• Adjustments or discrepancies between the batch total and the actual sales detail are offset against the same or subsequent business day’s settlement total.

Settlement adjustments. Discover makes adjustments on transactions that have been improperly processed. Adjustments may be initiated by Discover or at the merchant’s request. Reasons for adjustments include:

• Sales or returns processed on the incorrect account number.
• The total of card sales and credits submitted with the merchant’s batch did not match the actual total of transactions processed by Discover.
• Card sales or credit slips were illegible, incorrectly completed or incomplete.
• Items other than card sale transactions or credits were submitted.

Discover uses the following adjustment reason codes:

Merchant statements. Discover provides merchants with monthly activity reports listing the card transactions processed by the merchant during the period covered by the reports, including any sales, the merchant fees and other fees applicable to these sales, any credits, chargebacks and any other transactions. Typically, these reports are included in the processing statements that Visa and MasterCard processors send to their merchants. In fact, most processors now fund their merchants for their Discover transactions, in addition to the Visa and MasterCard ones.

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).

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).