Into the Black Hole

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.

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Just as with Visa and MasterCard transactions, merchants are required to obtain an authorization before completing any Discover card transaction. Discover authorizations are valid for 90 days and can be obtained electronically or over the telephone. Upon approval, Discover issues an authorization code, which must be written on the sales receipt, unless the authorization was obtained electronically. In a card-present environment, an electronic authorization request consists of the complete contents of the magnetic stripe on the card presented by the customer, read by the point-of-sale (POS) terminal. In card-not-present transactions, an authorization requests consists of the data, submitted by the merchant (in MO / TO transactions) or the cardholder (in e-commerce transactions).

If a merchant accepts a card payment without receiving an authorization, Discover is not required to pay for the sale. If a payment has already been received, Discover may charge back the transaction. As with Visa and MasterCard, an authorized Discover transaction can still be charged back for other reasons.

Discover authorization procedures:

• Electronic authorization procedures. If you use a POS terminal for accepting card payments, just follow the procedures given to you by your terminal provider for the use of that terminal. If your authorization request returns a “call center” referral code, call Discover’s Authorization Center at 1-800-347-1111 for further instructions (see below). This is also referred to a voice authorization. Additionally, you are required to contact the Authorization Center if your POS terminal is not working.
• Voice authorization procedures. Whenever you have to request a voice authorization, call Discover at 1-800-347-1111 and provide the following information:
  • Card account number (16 digits).
  • Your Merchant ID number (15 digits).
  • Card expiration date (4 digits – MM / YY).
  • The dollar amount of the transaction including tax and tip (dollars and cents).

If your request is approved, you will be given an authorization code, which you must write in the appropriate place on the sales receipt. If you received an authorization code by telephone, complete the transaction (force enter the sale). If a card is invalid, you will receive a message declining the transaction. You should never force transactions where authorization was declined and ask your customer for an alternative payment method instead.

Authorizing installment sales transactions. If you process installment payments, Discover requires that you receive a separate, current authorization for each installment before submitting it. You should do this anyway, as card account information (e.g. expiration date, card security code or even account number) can and does change over time.

Cancellation or change of authorization. If a previously authorized sale is canceled or its amount changes, you have to call Discover and request a cancellation of the authorization. An authorization can be canceled within 8 days of receiving it. You will have to provide the following information when canceling an authorization:

• Card account number (16 digits).
• Your Merchant ID number (15 digits).
• Card expiration date (4 digits).
• The dollar amount of the transaction including tax and tip (dollars and cents).
• Original authorization code given to you by your authorization provider for card transactions.
• The new sale’s amount, if different from the original one.

Authorization floor limit. Discover’s floor limit is zero, which means that you have to request authorizations for all card transactions. If you accept a sale without first obtaining an authorization, Discover may immediately charge it back to you.

Downtime authorization procedures. If Discover’s authorization system is unavailable, the floor limit for the duration of the system down-time is $150.00, but only for sales involving purchases of merchandise for which a cardholder takes immediate possession. For sales requiring delayed delivery, merchants should instead wait and obtain an authorization when the system is available.

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Installment payment plans are set up when a single purchase of merchandise or services is billed to an account in multiple segments (installments), over a period of time agreed upon between a customer and a merchant. Installment plans are similar to recurring payment plans in that payments are made on a continuous basis for some time in the future. There is a clear distinction, however, and it can be found by looking into the time frame of the payment arrangement and the share of the purchased product or service received by the customer at the time the sales contract is signed:

• With recurring payment arrangements products or services are received over time, while an installment transaction represents a single purchase where the customer receives the purchased item immediately upon signing the contract, with payments occurring on a schedule agreed by the cardholder and the merchant.
• With recurring plans the product or service can be received for an indefinite amount of time, until the plan is canceled, while installment plans payments are scheduled for a specific time period.

An example for an installment payment plan would be a car loan or a house mortgage, where consumers make a fixed number of monthly payments until the loan is paid off. Recurring plans are newspaper subscriptions, cable TV and internet services, etc.

The following best practices will help you to manage your installment payment plan arrangements more efficiently and to improve customer satisfaction:

• Give customers the option of choosing their billing date. This is especially important in arrangements where the payments are drawn from a checking account, as your customers know best when funds are available.
• Inform customers how your business name will appear on their 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.
• Always ask the cardholder for his or her billing address as it appears on their statement and if different, the complete shipping name and address.
• Provide an easily accessible link to your cancellation policy on the purchase agreement or on your website. If a purchase is canceled, make sure the billing is immediately discontinued and promptly process credits when applicable. This will help minimize customer disputes and chargebacks.
• Provide your customers with clear information concerning the billing arrangements and all applicable shipping charges. Send a billing reminder 14 days prior to processing each payment.
• For web-based transactions, require that your customers accept your terms and conditions statement by clicking on an “Accept” or “Agree” button.
• Use the Address Verification Service (AVS) with the first payment. The AVS verifies the validity of the billing address provided by your customer by comparing it to the one on file with the card issuer.
• Ask for the card security code (CVV2, CVC 2 or CID) when processing the first payment. Card security codes are the three-digit numbers found in the signature panels on the back of Visa, MasterCard and Discover cards and the four-digit numbers found slightly above and to the right of the account numbers of American Express cards. The credit card companies introduced the security codes as an additional way to help merchants who accept payments in a non-face-to-face setting verify that their customers are in a physical possession of the card at the time of the transaction. Be advised that you should never store card security codes in any way to avoid fines.
• If merchandise cannot be delivered as promised, immediately notify your customer. Explain the reason for the delay and provide information on the expected new delivery date.
• Provide a toll-free number for customer inquiries and cancellation requests. Display your customer service number prominently on your website, so that it is easy to locate.

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Recurring payment plans. Recurring payment plans exist when multiple transactions are processed at predetermined intervals, as a result of an agreement for the purchase of products or services that are provided over time. A cardholder authorizes a merchant to charge his or her payment card on a regular basis (usually monthly, but it can be at other intervals) for a period of time, however the interval between any two consecutive transactions cannot exceed one year. The transaction amount can be fixed or it can vary. The recurring payment plan is in effect until canceled by the consumer. A good example is a newspaper subscription where a consumer can be making payments indefinitely, until the subscription is canceled. A recurring plan differs from an installment payment plan in that in the latter you have a fixed amount to be paid and the installments are agreed upon in advance and made until paid in full.

Benefits. Recurring payment plans help simplify the process of billing a cardholder for a product or a service that is being provided on a continuous basis. The main benefits that merchants get from a recurring payment plan are that it reduces costs, associated with the processing of a single payment, while simplifying the billing process and saving time. Recurring payments also help increase customer loyalty, increase efficiency and improve the cash flow by ensuring timely and regular payments.

Key features. A typical merchant / customer relationship involving a recurring payment plan features the following characteristics:

• A consumer agrees to receive ongoing services or goods until the contractual arrangement with the merchant is canceled.
• The consumer gives permission to the merchant to bill his credit card account on a recurring basis.
• A transaction amount is agreed on that may be a fixed amount or may vary with each billing.
• A recurring payment relationship consists of more than the initial transaction, with future payments occurring on a regular cycle: weekly, monthly, etc., but not to exceed twelve months.

Installment payment plans. Installment payment plans are similar to recurring ones, however there is a distinction. Installment payment plans consist of a single purchase of goods or services that is billed to an account in multiple segments, over a period of time. A good example would be a car purchase, where a consumer has agreed to receive a loan for a portion of the purchase amount and to repay that loan over a specified period of time.

Recurring vs. installment payment plans. The distinction between recurring and installment payment agreements is that a recurring transaction is payment for goods or services that are received over time, whereas an installment transaction represents a single purchase, with payment occurring on a schedule agreed by a cardholder and merchant.

Recurring Payment Indicator. Recurring Payment Indicator is used to identify recurring transactions within authorization and settlement messages in card-not-present environment. The Recurring Payment Indicator is required in all authorization and clearing records. Recurring transactions are typically lower risk than single transactions and should be approved, provided the account is in good standing.

Recurring payment plan best practices. For best results and to minimize customer disputes, merchants should incorporate into their billing procedures the following best practices:

• Allow customers to choose the billing date. They know best when the money will be available.
• Inform the cardholder how your business name will appear on their card statements. Ensure that the “Doing Business As” name, or some other name, easily recognized by the cardholder, is used when billing or corresponding with the cardholder. Your processing bank will be able to set your billing descriptor to show the desired name.
• Provide a clear statement of your cancellation policy on the cardholder’s agreement and your website. This will help minimize chargebacks.
• Provide the cardholder with clear information regarding the billing arrangements, all charges related to the delivery of products and services.
• Ensure that billing is discontinued immediately upon the cardholder fulfilling the cancellation terms and provide the cardholder with cancellation confirmation including when the last billing will occur if this has not already occurred, or if a credit is due when the credit will be processed.
• Ensure that the cardholder is notified when goods or services cannot be delivered or provided on the agreed upon date.
• Provide the cardholder with an easily accessible contact number for customer service inquiries, and also the right to terminate the recurring transaction.
• Ensure an authorization request is made and approval is obtained before a payment is submitted for clearing.
• Make sure that all transactions reflect the Recurring Payment Indicator.
• Contact the cardholder to obtain alternative account billing details if the authorization response is a decline.

Merchant pre-billing notification. You should provide a merchant pre-billing notification prior to submitting an authorization request for a recurring transaction and you will see less customer disputes and chargebacks. Following is a sample of such a notification.

“To: customer name@account.com From: merchant name@account.com

Subject: Recurring transaction notification Date: 8 January 2010 03:15:02 -0500

Dear Customer Name,

This email confirms your authorization* of the

transaction listed below, entered on 01/08/2010 at 3:14:49 AM

has been processed and will be debited from your account.

Transaction Origination Date: 01/08/2010

Name on Account: Cardholder Name

Amount: $14.95

Description: Approved recurring charges on 2009-12-08

*You have authorized Merchant Name Services, Inc and your

financial institution to initiate the transaction

detailed below. You have acknowledged that the origination

of debit or credit transactions to your account must comply with

the provisions of local laws. This authorization is to

remain in full force and effect until Merchant Name Services,

Inc has received written notification from you of its

termination in such time and manner as to afford

Merchant Name Services, Inc and your financial institution a

reasonable opportunity to act on it.

Processed for: Merchant Name Services, Inc

Phone #: 800-111-1111

Email: merchant name@isp.com”

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