Credit Card Processing Blog

Both Visa and MasterCard use special Reason Codes to designate chargebacks resulting when a card issuer receives a complaint from a cardholder stating that a merchant did not issue a refund when a purchased product was returned or services canceled, or a refund was issued but for a reduced amount, without proper disclosure. Visa uses Reason Code 85 and its MasterCard’s equivalent is 4860.

What causes these chargebacks? Chargeback Reason Codes 85 and 4860 may be caused because the merchant:

• Did not issue a credit.
• Issued the credit but did not deposit it with its processing bank in time for it to appear on the cardholder’s next statement.
• Did not issue a credit, because it does not accept returns, but did not properly disclose its return policy.

How to manage such chargebacks? The time frame to respond to Reason Codes 85 and 4860 is 120 days. Your response will depend on the particular transaction circumstances and the actions you have taken (or not) so far:

• Returned product or cancellation was not received. If you never received the returned merchandise or the service was not canceled, contact your processor immediately and explain the situation.
• Product was returned contrary to the disclosed policy. If the merchandise was returned not in the manner described in your return policy, provide your processor with documentation proving that the customer did agree with it and signed it. Keep in mind that, if your return policy is located on the back of the sales receipt, you will have to obtain your customer’s initials there, in addition to the signature on the front. When providing supporting evidence, you must send copies of both the front and the back of the receipt.
• Credit was issued. If you did issue a credit for the returned merchandise at issue, contact your processor and provide them with the date and amount of the credit.
• Credit is not yet issued. If you did not issue a credit for product that was returned according to your return policy, there is no remedy and you should accept the chargeback. Do not process the credit now, as the chargeback has already done that for you.

How to prevent chargeback Reason Codes 85 and 4860? Many of these chargebacks can be prevented by implementing the following best practices:

• Issue credits promptly and as agreed. If merchandise is returned according to your return policy, make sure to promptly issue a credit and to immediately notify your customer that it has been issued.
• Only issue credit to the card used in the sale transaction. Credit for returned merchandise should only be issued to the same card that was used in the original transaction. Ask your customers to retain the credit receipt until they see the credit posted on their accounts.
• Gift returns. If product was returned by a gift recipient and not by the cardholder, the credit to the gift recipient must be in the form of cash, check or a store credit. Be advised that, if the credit is to be issued to a bank card, it can only be issued to the one used in the transaction.
• Return policy disclosure. Make sure that your return policy is posted on the sales receipt. If not and until you do that, present an additional document (an invoice or contract) to your customer to sign. If the return policy is on the back of the receipt, make sure the customer initials it.
• No-return policy disclosure. If your organization does not accept returns, your policy should be clearly posted on the sales receipt and at checkout, for both virtual and physical stores.
• Obtain customer signature. Customer signature should always be obtained on your return policy; a verbal disclosure is not enough.

While it is not likely that you will ever be able to completely eliminate this type of chargebacks, developing a customer-friendly return policy will go a long way toward minimizing them. Customers expect that, if they are not satisfied with their purchase, a return will be accepted and a full refund issued. Otherwise, they will probably file a dispute with their credit card company. You will want to avoid such disputes, even if you believe you will win them, because customers are likely to broadcast them on the internet and damage your reputation. Customer disputes and resulting chargebacks are also closely monitored by processing banks that will promptly freeze your merchant account, if there is any uptick in such activities.

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).

Visa and MasterCard can initiate an audit of a merchant’s credit card processing account, whenever they have reasons to believe that the merchant may be a high-risk one or is processing invalid transactions. In particular, the following two reasons can be sufficient to trigger an audit:

• The processing bank may have reason to believe that the merchant is engaging in collusive or otherwise fraudulent or illegal activity.
• The processor determines that the merchant’s chargeback ratio or credits-to-sales ratio exceeds the standards set by Visa and MasterCard or its own standards, or both. We have discussed the Associations’ rules on excessive chargebacks in previous posts and encourage you to revisit them.

Processors will typically act quickly when they notice an activity that is outside of the established merchant pattern, because they are responsible for fraud-related chargebacks. For example, if a merchant submits a transaction at an amount substantially higher than the average transaction amount approved for the account, the processor will probably contact the merchant and want to find out why the amount is so high. Similar attention is paid to sales volumes. As completely legitimate merchants have learned to their surprise and annoyance, a rapid rise in their monthly sales invariably attracts their processor’s attention.

Moreover, even when fraud is absent or nor suspected, processing banks can have good reasons to be alert. The Associations assess processors penalty fees for merchants with high levels of chargebacks. For example, processors are required to report every merchant whose chargeback-to-transaction ratio (CTR) exceeds 50 basis points (0.50 percent) and pay a reporting fee of $50 for each report submitted. The fee rises steeply when the CTR exceeds 100 basis points (1 percent). To avoid paying these fees, processors will initiate a review long before the merchant comes even close to reaching either of these thresholds.

Whenever an audit is initiated by one of the Associations, it will contact the processor to explain the reasons why it believes the merchant may be in violation of the rules against processing invalid transactions and request information. Processors have 30 calendar days to return the requested information to the Association. Requested information typically includes the following items:

• A statement explaining whether, when, and how the processor became aware of fraudulent activity or chargeback or customer service issues, the steps it took to control the occurrence of fraud, and the circumstances surrounding the merchant’s termination.
• All internal documents about the opening and signing of the merchant including its application, merchant processing agreement, credit report, and certified site inspection report.
• All internal documents regarding the due diligence procedures followed before signing the merchant, including background checks of the company and its principals, as well as trade and bank references that the processor verified during the due diligence procedure.
• If an Independent Sales Organization (ISO) or a Member Service Provider (MSP) of the processing bank has facilitated the signing of the merchant, the ISO / MSP must include the due diligence documents. (In such cases the processor must distinguish between the due diligence conducted by its employees and its ISO’s / MSP’s employees.)
• Additionally, if an ISO / MSP assisted in the signing of the merchant, the processing bank must provide all due diligence documents regarding the representative that signed the merchant.
• Reports confirming an inquiry by the processor into the Member Alert to Control High-Risk Merchants (MATCH) system before signing the merchant and, if applicable, input of the merchant to the MATCH system database within five business days after its decision to close the merchant.
• Additionally, during the review period, the processor will be required to provide the following documentation:
  • Authorization logs for the merchant.
  • A monthly breakdown of chargeback and credits by count, amount, and issuer bank identification number (BIN) for the violation period.
  • A complete record of the merchant sales volume, including the number of transactions at the location, for the period for which the authorization logs are requested.

As you see, there is a lot of documentation that will be looked at and, if something is not done according to the applicable rules, it will most likely be found and the account will be terminated (if it has not been already) and the merchant will be added to the MATCH file. Moreover, during an audit, the merchant may be listed on the MATCH system under MATCH reason code 00 (Questionable Merchant).

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).

Do you ever monitor your daily batch deposits? Do you know how your daily transaction volumes vary over a week or a month? Do you track how your average sale’s amount or transaction count changes from month to month? No? Well, your processor does and, if you want to avoid potential unpleasant surprises resulting from changes in these or other patterns in your daily batches, you should too.

Unfortunately, such unpleasant surprises occur far more often than we would like. They come in the form of an audit of the merchant’s credit card processing practices and can take anywhere from a day to a week or more to be resolved, depending on how quickly the merchant provides the requested documentation (e.g. sales invoices, bank statements, etc.). The worst part of an audit is that, while it lasts, the merchant’s funds are frozen and no deposits go into its checking account.

So what is it that processing banks are looking for when monitoring your daily batch deposits? To answer this question, we should look at the requirements that Visa and MasterCard (the Credit card Associations) have set for their member banks. Whether your processor is Bank of America, Wells Fargo, First National Bank of Omaha or any other bank, they all have to comply with the Associations’ rules.

Processing banks are required to generate daily reports or real-time alerts monitoring merchant deposits no later than on the day following the deposit, which must be based on the following parameters:

1. Increases in merchant deposit volume.
2. Increase in a merchant’s average ticket size and number of transactions per deposit.
3. Change in frequency of deposits.
4. Frequency of transactions on the same cardholder account, including credit transactions.
5. Unusual number of credits, or credit dollar volume, exceeding a level of sales dollar volume appropriate to the merchant category.
6. Large credit transaction amounts, significantly greater than the average ticket size for the merchant’s sales.
7. Credits issued subsequent to the receipt of a chargeback with the same account number and followed by a second presentment.
8. Credits issued to a card account number not used previously at the merchant.

Moreover, there are a couple of additional metrics that processors are either required or encouraged to monitor and you should be aware of them:

• 90-day rule. Processing banks are required to compare their merchants’ daily deposits against the average transaction count and amount for each merchant over a period of at least 90 days, to lessen the effect of normal variances in a merchant’s business. For new merchants, processors should compare the average transaction count and amount to other merchants within the same merchant business code (MCC) assigned to the merchant. In the event that suspicious credit or refund transaction activity is identified, the processor should consider the suspension of transactions and initiate an audit.
• 150 percent recommendation. To minimize the probability of investigating variances that are consistent with the merchant’s business cycle (i.e. seasonal, monthly, etc.), the Associations require that merchants that appear in the monitoring reports should exceed the average by 150 percent or more. However, the amount over the average is left at the processing bank’s discretion.

So if you want to make sure that you don’t get surprised by an audit, which by the way always happens at the most inconvenient moment, start monitoring the eight parameters listed above on a daily basis. Implement the 90-day rule and, whenever your transaction count or deposit amount exceeds the average by 150 percent or more, be proactive and contact your processor and alert them. You will find that they are much easier to work with when you show that you understand their concerns.

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).

Yesterday’s post reviewed how the Member Alert to Control High-Risk Merchants (MATCH) works and how it affects merchants and processors. This article will elaborate on the possible results from searches in the MATCH database. Firstly, though, it should be pointed out that all positive responses to a MATCH search are considered “possible matches” because the search system cannot guarantee an exact match with absolute certainty. This is the reason why you will see an oxymoronic-sounding “exact possible match” item in the list below.

A MATCH search can return one of the following types of possible matches:

• Retroactive possible matches. If the information in the original inquiry finds new possible matches of a merchant or inquiry record in the MATCH database added since the original inquiry was submitted and this information has not been previously been reported to the processing bank at least once within the past 120 days, the system returns a retroactive possible match response.
• Exact possible matches. An exact possible match exists when data in an inquiry matches data in any of the following data fields on the MATCH system letter-for-letter, number-for-number, or both.
  
  

  Field	+	Field	+	Field	=	Match
  Business Phone Number					=	√
  Business National Tax ID	+	Country			=	√
  Business State Tax ID	+	State			=	√
  Business Street Address	+	City	+	State	=	√
  Business Street Address	+	City	+	Country	=	√
  Principal Owner’s (PO) First Initial	+	Last Name			=	√
  PO First Name	+	Last Name			=	√
  PO Phone					=	√
  PO Social Security Number (if the country is USA)					=	√
  PO National ID (if the country is not USA)					=	√
  PO Street Address (lines 1 and 2)	+	PO City	+	PO State	=	√
  PO Street Address (lines 1 and 2)	+	PO City	+	PO Country	=	√
  PO Driver’s License (DL) Number	+	DL State			=	√
  PO Driver’s License Number	+	DL Country			=	√

  
  MATCH uses Street, City, and State if the merchant’s country is USA. Otherwise, Street, City, and Country are used.

• Phonetic possible matches. The MATCH system converts certain alphabetic data, such as Business Name and Principal Owner Last Name into a phonetic code, which generates matches on words that sound alike, such as “Easy” and “EZ.” The phonetic feature of the system also matches names that are not necessarily a phonetic match but might differ because of a typographical error, such as “Rogers” and “Rokers,” or a spelling variation, such as “Lee,” “Li,” and “Leigh.” MATCH evaluates the following data to determine a phonetic possible match:
  
  

  Field	+	Field	+	Field	=	Match
  Business Name					=	√
  Doing Business As (DBA) Name					=	√
  Business Street Address	+	City	+	State	=	√√
  Business Street Address	+	City	+	Country	=	√√
  Principal Owner’s (PO) First Initial	+	Last Name			=	√
  PO Street Address (lines 1 and 2)	+	PO City	+	PO State	=	√√
  PO Street Address (lines 1 and 2)	+	PO City	+	PO Country	=	√√

  
  MATCH uses Street, City, and State if the merchant’s country is USA. Otherwise, Street, City, and Country are used.

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).

Member Alert to Control High-Risk Merchants (MATCH) is a mandatory system for U.S. acquiring (processing) banks. It is a database that includes information reported by processing banks about merchants and their owners whose merchant accounts have been terminated for cause. The MATCH system is sometimes referred to as the Terminated Merchant File (TMF).

MATCH requirements for processors. All processing banks are required to use MATCH. In particular, processors are required to:

• Add information about a merchant that is terminated for cause. If either the processor or the merchant acts to terminate a merchant account (by giving notice of termination), then the processor must add the required information to MATCH within five calendar days of the earlier of:
  • The effective termination date or
  • The date it received the termination notice by the merchant.
• Inquire against the MATCH database. When a processor considers signing an agreement with a merchant, it must first check MATCH for information on whether the merchant was terminated by another processor.

MATCH system features. MATCH offers processing banks the following fraud detection features and options for assessing risk:

• Processors can add and search for information about up to five principal and associate business owners per merchant.
• Processors can designate regions and countries for database searches.
• MATCH uses multiple fields to determine possible matches.
• MATCH edits all data and notifies inquiring processors of errors as records are processed.
• MATCH supports retroactive alert processing of data residing on the database for up to 120 days.
• Processors determine whether they want to receive inquiry matches, and if so, the type of information the system returns.
• MATCH processes data submitted by processors once per day and provides daily detail response files.
• Processors can access MATCH data online in real time.

An inquiring processor can contact the listing processing bank directly to determine whether the merchant that is being reviewed is the same merchant previously reported to MATCH, terminated, or inquired about within the past 120 days.

MATCH database searches. MATCH searches the database for possible matches between the information provided in the inquiry and the following:

• Information reported and stored during the past five years.
• Other inquiries during the past 120 days.

MATCH searches for both possible exact matches and possible phonetic matches. All positive MATCH responses are considered “possible matches” because the search mechanisms cannot guarantee a true and exact match with absolute certainty. There are two types of possible matches, including a data match (for example, name to name, address to address) and a phonetic (sound-alike) match made using special software. It is up to the inquiring processor to determine whether a possible match is trustworthy.

MATCH searches return the first 100 responses, including all terminated merchant MATCH responses, regardless of the number of possible matches.

Merchant records remain on the MATCH system for five years. Each month, MATCH automatically purges any merchant information that has been in the database for five years.

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).