Inside the Black Hole

Credit card transactions processed for cruise line-related charges have some unique features and require that merchants follow specific procedures, especially in regards to payment authorization requests. It should be emphasized that all merchants processing payments for cruise line-related charges are considered high risk by both Visa and MasterCard and are closely monitored by their payment processors who must ensure compliance with industry regulations or face stiff fines by the Associations.

Merchants should comply with the following requirements when authorizing and settling cruise line-related credit card payments:

• Obtain an incremental authorization approval for on-board charges. You will have to obtain an incremental authorization approval for charges incurred on-board the liner, before charging your customer’s card. To do this, you should:
  • Follow standard authorization procedures to obtain approval for the incremental amount.
  • If authorization is declined, contact your customer and request an alternative payment method.
• Settle only the cumulative approved authorization amount if an incremental authorization is declined. You should never settle a transaction for on-board charges if the incremental authorization request was declined by the issuer, even if the original authorization request was approved. This will help you minimize chargebacks which, in turn, will reduce your processing costs and potential losses. If incremental authorization is declined:
  • Submit for settlement only the approved authorization amount and do not include any amounts for which authorization was declined.
  • Contact your customer and request an alternative form of payment for the declined incremental amount.
• Submit an authorization reversal if the originally approved authorization amount exceeds the actual cruise costs. In some cases, the previously estimated amount for which authorization was approved will exceed the actual cost of the cruise. In such cases, you will need to submit an authorization reversal for the difference between the authorization amount and the actual cruise costs.
• Understand and apply the final authorization and the 15 percent rule. When customers check out at the end of a cruise, authorization is required when:
  • There was no previous authorization. In such cases you should authorize the total transaction amount.
  • There was a previous authorization but the actual transaction amount exceeds the previously authorized amount. In such cases, you will need to apply the 15 percent rule to determine whether or not an additional authorization is required. To do this:
    • Add 15 percent to the previously authorized amount.
    • Compare the total amount (sum of the already authorized amount plus 15 percent) to the actual transaction amount.
    • If the actual transaction amount exceeds the total, an additional authorization is required for the difference (not for the whole amount!).
• Clearly disclose all terms and conditions of the sale. Your customers should know all terms and conditions of the sale before making a reservation. The following details should be clearly communicated:
  • The amount of the sale and associated booking fees.
  • How the fees will appear on the cardholder’s credit card statement (in total or separately).
  • When the fees will be billed.
  • What name will appear on the cardholder’s credit card statement. This information is managed through your merchant account’s billing descriptor. Contact your payment processor and make sure your billing descriptor is set up correctly. Issues may arise if your legal name is different from your “Doing Business As” (DBA) name, as your billing descriptor is typically set up to display the former, while your customers recognize the latter.

A clear disclosure of this information will help avoid unnecessary customer disputes and related chargebacks. For best results, require customers to accept your disclosure statement by clicking an “Accept” or “Agree” button on your website.

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).

Travel agencies are among the highest-risk merchants, as far as credit card processors are concerned. The reason is that historical data show that consumers are much more likely to dispute and charge back travel agency transactions than most others. To give you an idea of how the payment card industry views travel agencies, consider the fact that travel agencies are placed in the same risk group with merchants selling adult products, escort and companion services, fortune tellers, diet programs with guaranteed results and sports forecasting or odds making. The consequence of this policy is that new travel agencies find it extremely difficult to set up a merchant account, as most processors require prior credit card processing experience to show them that the applicant can manage risk sufficiently well to keep customer disputes and chargebacks within reasonable limits. Established travel agencies are closely monitored to ensure that they too remain focused on managing risk.

So what should you do, whether you have just started your travel agency or have been in business for years to mitigate credit card processing risk?

Firstly, before you even apply for a merchant account, you will need to understand the potential sales agent liability associated with selling air fares online. Understanding your risk exposure will help you take adequate steps to minimize it and protect your travel agency from losses associated with chargebacks resulting from customer disputes and fraudulent transactions. As a sales agent of an airline, for example, your travel agency may be liable for the entire amount of an airline ticket, if it is successfully disputed by a customer or if it was purchased with a stolen credit card. To mitigate your risk, you will need to set up card acceptance policies and procedures to address the following issues:

• An authorization request that is approved by an issuer indicates that the credit card account is in good standing. However, the authorization approval is not a proof that the legitimate cardholder is making the purchase, nor is it a guarantee of payment. Be advised that, in most cases, airlines are liable for fraudulent card-not-present transactions, even when they were approved by the card issuer.
• As a travel agency, your organization may not necessarily be a Visa or MasterCard merchant, subject to the Credit Card Associations’ rules and regulations. However, the airline is a Visa and MasterCard merchant and it is subject to their rules and regulations. Be advised that, in most fraud-related transactions, the airline transfers financial liability to the travel agency it has partnered with as part of the contractual agreement. In such cases your organization will bear the full financial responsibility.

When selecting a payment processor, be sure to choose one with experience in working with travel agencies and other high risk merchants. Your processor must be able to assist you in developing and implementing your fraud prevention procedures and be proactive in identifying and correcting potential weak spots in your processing cycle. It is true that at first you may not have much of a choice when applying for a merchant account, as most U.S. processors will not accept a new travel agency under any circumstances. Once you establish yourself, however, you will have much more leverage. Typically, processors will request that established high risk merchants provide processing statements for the latest six months of operations. If your statements show that you have managed to keep chargebacks down, most processors will be willing to work with you and you will have the choices you were initially denied.

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Travel agencies are infamous in the payment card industry for producing some of the highest levels of credit card fraud, especially in card-not-present transactions. So infamous in fact, that most U.S.-based payment processor will not provide merchant services to new travel agencies and will go into great lengths to ensure that applicants with processing history can actually be trusted to implement adequate risk management procedures to minimize fraud, customer disputes and chargebacks.

What exactly makes travel agencies so risky and unpalatable to processors? Well, the question is more like whether there is a high-risk transaction characteristic that is missing from their sales. Travel operations tend to involve high-ticket, high-volume sales, often exclusively conducted in a card-not-present environment. These are the classical high-risk features, but travel agencies go beyond that. In most of their transactions the service is provided weeks or months after the sales date, which leaves plenty of time for even perfectly legitimate sales to deteriorate into chargebacks. So if you bought a cruise package for the summer, but a family emergency prevented the trip, you would have to cancel the transaction. Yes, you would be allowed to do that, but you would have to pay a cancellation fee. True, the cancellation fee was prominently featured in the contract that you signed, but this doesn’t make it any more enjoyable. You would still go ahead and honor your contractual obligation, but many others would do their best to avoid it, including filing a dispute with their card issuer. And if legitimate transactions can be a source of disputes, what about the fraudulent ones?

Yes, the high levels of fraudulent transactions have not done much to improve the status of travel agencies as one of the highest risk credit card processing types of businesses in the U.S. Yet, many organizations have managed to develop risk management systems that have reduced their risk exposure and have improved their card processing credentials. Crucially, the successful travel agencies have trained their staff in the proper application of these card acceptance best practices on a consistent basis. The following procedures should be taken into consideration when developing your own set of best practices:

• Set aside large-value bookings for fraud review. Large-value transactions may increase your exposure to fraud and customer disputes. A careful review of such transactions before they are settled can mitigate risk and minimize potential fraud-related losses. For best results contact the cardholders involved in such transactions to verify the booking.
• Track key fraud characteristics. Track known fraud transactions and identify all key characteristics in these bookings. Then store the information in a database that you can use to make risk assessment. The following characteristics should be included:
  • Passenger name, address and telephone number.
  • Cardholder name, address and telephone number.
  • Email addresses, Internet Protocol (IP) addresses and Internet Service Providers (ISP).
  • Transaction times, amounts, airlines, classes of service and travel itineraries.
• Screen high-risk bookings. Screening high-risk bookings can help you detect and prevent fraud before it happens. Make sure that you screen bookings with the following characteristics:
  • Passenger name is different from cardholder name.
  • First or business class tickets.
  • Electronic tickets or tickets not delivered to the billing address.
  • Date of travel is less than six days after the date of purchase.

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).

In the payment card industry, reserve is a specified percentage of the merchant’s sales deposits that is retained by the processing bank in an escrow account to serve as a protection against future chargeback exposure or to cover existing chargebacks. The reserve’s amount is determined during the merchant account application process and is estimated as a portion of the expected monthly revenue from the applicant merchant’s card transactions.

Reserves are typically imposed on merchants that operate in high-risk industries or have little or no card processing experience. Reserve accounts do not last indefinitely and after the satisfactory completion of a predetermined period – typically six months to a year – the withheld amounts are returned to the merchant. In the case of a rolling reserve, a predetermined amount is held every month for a certain period. On the month following the expiration of this period, the first month’s reserve amount is released to the merchant. The next month the merchant gets the second month’s reserve amount and so on until there is no longer a reserve.

Certain business operations are considered higher risk than others, because historically they have generated higher levels of chargebacks. All merchants that operate in a card-not-present environment fall into this category. Mail order, telephone order and e-commerce merchants are prime examples. Yet, only a small percentage of these businesses will be asked for a reserve, as most merchants within this category do not present a huge chargeback liability. The biggest factor that influences an underwriter’s decision on whether or not a reserve should be required is the level of risk that the applicant merchant’s operations present. Typical high-risk operations display one or more of the following characteristics:

• Selling specific types of products or services, such as adult products, auction houses, companion / escort services, coupons / certificates / prepaid or gift cards, dating services, diet / weight loss programs, membership-based services, etc. If an applicant’s operations fall into one of the above listed category, this could be sufficient for imposing a reserve.
• High average transaction amount.
• High overall processing volume.
• The applicant business has previously had its merchant account terminated.

Underwriters may also impose a reserve on an applicant with bad credit history, in addition to requesting a personal guarantee. When a reserve is required, the minimum reserve amount is typically set at about 20 percent of the anticipated card processing volume. New merchants are usually allowed to build up their reserve by sending in transactions which are not withdrawn until the minimum reserve amount is accrued. After that, the merchant is allowed to withdraw the excess funds for transfer to their designated bank account.

Each processor has its own underwriting policy, so it is a good idea that you request several credit card processing proposals, when looking for a merchant account, and compare the proposed terms. It is likely that one processor will ask for a reserve, while another will not. A reserve requirement, however, is just one of the factors that you should consider when selecting a payment processor for your organization. Processing costs, customer service, transaction reporting capabilities, chargeback and risk management tools, fraud prevention services are all very important and should be carefully evaluated.

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).