Introduction
to Merchant Services
Dear
New or Prospective Credit Card Merchant:
You
are a new or prospective merchant who is excited
about the opportunity to accept credit cards as
payment for the goods and services you provide.
You are probably thinking that this opportunity
will make it easier for your customers to pay you,
open other avenues of marketing and selling (e.g.
the Internet), and protect you from the hassles
and risks of bad checks. You are right - it can
do all of this. However, accepting credit cards
for payment carries with it some responsibilities,
and is not entirely risk free to you, the merchant.
(There is no free lunch!). This white paper is
intended to provide you with some important information
regarding:
• How
the credit card system works,
• Some things to watch out for, and
• Your responsibilities as a merchant.
First,
here are some merchant account definitions.
Your
customer, the "Cardholder",
obtains his/her MasterCard or Visa credit card
from a bank. The bank is called the "Issuing
Bank" since it is the bank that issues
the card to the Cardholder. (American Express and
Discover work a bit differently, but the principles
in this white paper apply to these card types too!).
You,
the Credit Card Merchant, obtain your "Merchant
Account" from a "Sponsoring
Bank", sometimes called an "Acquiring
Bank" or "Merchant Bank".
It is called a Sponsoring Bank because the bank
is sponsoring you, the Credit Card Merchant, as
a business that is qualified to accept credit cards.
Your Sponsoring Bank typically uses a "Processor" to
acquire the credit card transactions from you and
process them through the bank system.
By
giving a credit card to a Cardholder, the Issuing
Bank is granting the Cardholder the rights to borrow
money from the Issuing bank (up to a "Credit
Limit") for the purposes of purchasing
goods and services from a bona fide Credit
Card Merchant such as yourself.
How are transactions processed?
When you, as a Credit Card Merchant, want to
accept a credit card for payment of your goods and services, you first submit an authorization transaction to your Processor.
Your
Processor accesses the Visa/MasterCard network
to communicate the authorization transaction (containing
a "Transaction Amount") to the Issuing Bank to ensure that the credit card is valid and that the Transaction Amount does not exceed the Cardholder's credit limit. The authorization
transaction also puts a "hold" for the Transaction Amount on the Cardholder's credit limit. That way, the funds are available to you when you submit the corresponding "Deposit" transaction.If
the authorization succeeds, and you subsequently
(or at the same time) submit the Deposit transaction,
you are informing (in effect promising) your Processor,
your Sponsoring Bank, and the Issuing Bank that you
are prepared to deliver to the cardholder the goods
and services that are expected by the cardholder,
and that you wish to receive payment for these goods
and services from the Issuing Bank.Your Processor,
based on your Deposit instruction, then again works
within the Visa/MasterCard network to request the
Issuing Bank to deposit the "Net Settlement Amount" (i.e. the "Transaction Amount" less the "Discount
Amount") into your bank account at your Sponsoring
Bank.The Discount Amount (i.e. the Discount Rate
times the Transaction Amount) and other fees, such
as transaction fees, are used to pay the various
entities that help you collect from the Issuing Bank.
In particular, the Issuing Bank, the Visa/MasterCard
Network, the Sponsoring Bank, and the Processor all
share in dividing up the Discount Rate proceeds.
OK, now lets talk about protection.
Who does the credit card system protect?
First, it provides some protection for you, the Credit Card Merchant. When you sell goods to a Cardholder, and you have received authorization for the Transaction
Amount from the Issuing Bank, then the Issuing Bank is promising you that after you submit the Deposit transaction it will deduct the Transaction Amount from the Cardholder's credit limit, and in cooperation with your
Processor, transfer the Net Settlement Amount into your bank account at your Sponsoring Bank.
However, this promise from the Issuing Bank does not come without some strings attached. When you submit the Deposit transaction, you are, in effect, promising the Issuing Bank that you will deliver to the Cardholder
the goods and services that you promised to the Cardholder.
In
effect, the Issuing Bank's promise to pay you
is only as good as your promise to the Issuing
Bank that you will deliver "expected" goods and
services to the Cardholder. The word "expected" is important. If you have made representations to the Cardholder, leading the cardholder to create "expectations" in his/her mind, then by accepting a
Credit Card for payment, you are in effect promising the Issuing Bank that you have or will "make good" on
those expectations.So it is a two way street. If
you make good on your promises to satisfy the Cardholder's
expectations, the Issuing Bank will make good on
its promise to pay you the Net Settlement Amount.In
order to expedite your payment of the Net Settlement
Amount, the entire system operates on the basis
of trust with you. When you submit the Deposit,
your Processor, your Sponsoring Bank, and the Issuing
Bank all TRUST that you have or will fulfill your
commitment to satisfy the Cardholder's expectations.
The system does not ask the Cardholder if he/she
is satisfied before you get your payment, the system
TRUSTs that you have or will (in the immediate
future) satisfy the Cardholder, and based on this
TRUST, your Processor instructs the Issuing Bank
to transfer the Net Settlement Amount into your
account at your Sponsoring Bank. In fact, that
is one reason why your Sponsoring Bank is called "Sponsoring".
The bank is sponsoring you as a trustworthy merchant
- one that consistently fulfills the Cardholder's
expectations.
Now,
here is the rub. What happens if the Issuing Bank
gets informed by the Cardholder that you did not
fulfill the Cardholder's expectations?
Cardholder's Expectations Maybe the Cardholder thinks that you never delivered the goods and services you promised him/her.Maybe the Cardholder thinks that he/she never ordered the goods or services that showed up on the Cardholder's credit card bill from the Issuing Bank.
Maybe
the Cardholder received the goods and services,
but they did not meet the Cardholder's expectations,
so the Cardholder wants to return the goods (if
any) and wants his money back (e.g. a refund).Well,
the Issuing bank still is operating on the TRUST
system. They assume that either the cardholder
is mistaken, or that you, as a trustworthy merchant
have or will "make good" on your promises
to the Cardholder. But the Issuing Bank is obligated
to investigate the Cardholder's complaint.To
resolve a Cardholder complaint regarding non
receipt of goods or services, the Issuing Bank
first (typically) sends a Retrieval Request to
your Processor. Your Processor will then forward
this Retrieval Request to you. The Retrieval
Request is basically asking you, the Credit Card
Merchant, for proof that you sold and delivered
the disputed goods or services to the complaining
cardholder. This proof usually consists of a
document, in your possession, that has been signed
by the Cardholder acknowledging the Cardholder's
receipt of the goods or services that were charged
on the credit card. If you can prove in a timely
fashion that you delivered the goods or services
to the Cardholder, then your Processor will forward
that information to the Issuing Bank, who in
turn will inform the Cardholder, and the complaint
is usually dropped (but not always).Important!.
If you do not have such a "proof" document,
or something equivalent, or if you cannot find
and deliver a copy of that document to your Processor
in a timely fashion, then you need to know that
the system will assume that the Cardholder is
right and that you did NOT deliver goods and
services as you promised when you submitted the
deposit transaction. When this happens, several
things occur. First, the Issuing Bank submits
a chargeback to your Processor. Simultaneously,
the Visa/MasterCard network takes the original
Transaction Amount of the disputed transaction
out of your bank account at the Sponsoring Bank.
(Often, this is a deduction from the net settlement
for your most recent deposit transactions). Finally,
the chargeback goes on your Merchant Account
Record.Are chargebacks bad? The answer is YES
- you need to do everything you can to avoid
them. The system understands that if you do any
volume at all, some small number of chargebacks
may be unavoidable, and part of the cost of doing
business. (You should assume this too in your
budgeting). However, if you get too many chargebacks,
then the system starts wondering about the TRUST
it put in you. This jeopardizes your standing
as a Credit Card Merchant. If it gets too bad,
then your Merchant Account may be terminated
by your Sponsoring Bank, and you may find it
impossible to find another Sponsoring Bank. If
it appears that you intentionally created many
chargeback situations, then you may be liable
for charges of fraud, and criminal prosecution.
OK,
so part of your responsibility as a Credit Card
Merchant is to avoid chargeback situations. It
is not all that hard. Here are some guidelines
to help you do that.
Chargeback Guidelines
First, if you accept a credit card for payment, make sure that you are accepting it from the legitimate Cardholder, and not someone who just knows the card number, or has the card
in his possession. (Note, if a cardholder "knows" his card has been lost or stolen, and reports that fact, then your Authorization transaction will fail. However, if the cardholder is unaware that his card is
lost, or if just the card number was pirated and bogus charges have not appeared on the Cardholder's statement from the Issuing Bank, then your Authorization transaction may succeed).
If
you can physically touch the Cardholder's card (e.g.
the card presented to you by the Cardholder), then
you should verify the signature on the back of the
card matches both the name on the front of the card,
and the signature on your sales slip. If you can,
ask for another form of identification to give you
more confidence that the person who has physical
possession of the card is in fact the Cardholder.
If you cannot physically touch the card, (e.g. as in phone sales, mail order sales, and Internet sales), then it is more
difficult to verify that the person that is using the card number is in fact the Cardholder, and this increases the risk that someone is fraudulently using a stolen card number. In this case you have several methods for
verifying that the person providing the card number is the Cardholder.
- Get
the Cardholder's name and telephone numbers
(home and business phone), and if you are willing,
tell the presumed Cardholder that you intend
to call him back before delivery. Fraudulent
shoppers (people who use credit card numbers
that do not belong to them) will not want to
give out too much information to you that can
be traced back to them.If you are using the
Internet to capture orders, then require your
Internet order-taking software (or service
company) to capture and record as part of the
transaction the shopper's phone number and
Email address (and verify that the Email address
contains a valid domain name). Also require
your software or service bureau to capture
and record the shopper's IP address. If fraud
can be shown, then the IP address, along with
the time and date can be used to track down
the fraudulent party. (This threat may prevent
some attempted fraud). Also require your Software
or Internet order-taking service company to
post on the Internet a warning to shoppers
that attempted credit card fraud will be prosecuted
to the fullest extent of the law.For domestic
orders, take advantage of the address verification
service offered by your Processor. Address
verification requires that you capture the
Cardholder's billing address (the street number
and zip the Issuing bank uses to bill the Cardholder),
and then submit that address as part of the
Authorization transaction to your Processor.
Your processor will attempt to verify the address
with the Issuing Bank. If address verification
fails completely (for Domestic addresses),
you may wish to not accept the order, or to
confirm the order by telephone call to the
Cardholder. Address Verification is available
through many brands of PC credit card processing
software, and through most reputable companies
that offer a service for Credit Card order-taking
over the Internet.Do not ship to an address
that is not the same as the Cardholder's billing
address (as used in address verification).
A crook, using a stolen card number, will not
usually want you to ship to the real cardholder's
address, even if he knows it.
- Know your Cardholder personally if at all possible. If you have a repeat customer, and you know them personally, then you might be able to relax some restrictions you might otherwise apply.
If you cannot verify to your satisfaction that the person presenting the card number is, in fact, the Cardholder, then you need to decide the risk you are willing
to take. If you are delivering low cost services, or products for which your unit and shipping costs are low (e.g. software or manuscripts that are delivered over the Internet), and you have taken reasonable precautions
(e.g. as mentioned above), then you probably can accept the transaction, but expect some chargebacks. Remember, you are liable for the chargebacks, so if you expect some, then you need to budget for their occurrence.
If
you are delivering high cost services (e.g. that
consume a lot of your time), or products for
which your unit or shipping costs are high, then
a chargeback could force you to take a loss for
these costs, and you will want to reduce your
chargeback risks as much as possible. In particular,
you should avoid taking orders for high cost
goods to one-time customers in non-domestic (e.g.
overseas) locations.The second way to reduce
chargebacks is to get a signed receipt from the
Cardholder and if applicable a signed proof of
delivery from the shipper for delivered goods.
(A signed receipt from someone that is not the
Cardholder, or alternatively does not represent
the Cardholder, will not do you any good). This
signed receipt from the Cardholder is your proof
of sales and delivery that you will need to satisfy
any retrieval requests. Ideally, the receipt
should be signed by the cardholder, and the receipt
should be stored in your files so that you can
promptly respond to a retrieval request. If you
are accepting transactions and delivering goods
or services over the Internet, then be sure your
software or your service provider provides you
with a hard-copy receipt of the order and delivery
fulfillment, including as much information about
the Cardholder as possible. If you are delivering
by ground carrier, then use a carrier that requires
a signature on delivery, and allows you get a
printout of that signature.The third way to reduce
chargebacks is to advise shoppers of your warranty
and return policy, and then consistently live
up to that policy. Remember, your warranty and
return policy set expectations in the minds of
your customers, and as a trusted Credit Card
Merchant, you are obligated to meet those expectations.
If you are advertising and accepting orders on
the Internet, then California (and possibly other
states) requires you to include your phone number,
address, and return policy on the Internet order
form so that Cardholders know how to reach you
in case they wish to exercise their warranty
or return rights. Remember, if the Cardholder's
expectations are not met, and you do not issue
a refund for returned merchandise or otherwise
honor your warranty according to expectations,
then you may get a chargeback that you will have
to pay.Also, be sure your Internet software,
or your Internet Service Bureau permits you to
submit credit transactions to your Processor.
You will need to submit a credit transaction
if a Cardholder requests, and you grant, a refund
(full or partial) as per your refund/return policy.
There are four reasons why you should honor requests for refunds promptly.
Honoring Refunds
If you
get a chargeback of any kind, your reputation
as a trustworthy credit card merchant drops just
a little bit. If you get a lot of chargebacks,
your reputation drops a lot!. To keep your reputation
up, promptly issue refunds according to your
policy. Your Sponsoring Bank is counting on you
to issue refunds promptly. In fact, your Sponsoring
Bank and/or your Processor may request that
you report to them periodically on how you are
performing in this regard. If you are keeping
up your obligations, you will continue to be
viewed as a trustworthy Credit Card Merchant.
If you fall behind, then your Sponsoring Bank
may ask for a percentage of your deposits to
be put in reserve to help cover potential chargebacks.
If you fall behind in giving refunds, and do
not promptly inform your Bank or Processor that
you are behind, then you run the risk of your
Merchant Account being Terminated. You do not
want your Merchant Account to be Terminated.
When that happens, your Sponsoring Bank is obligated
by the Visa/MasterCard rules to put your name
in a master database that is accessible by all
Sponsoring Banks in the world. If one Sponsoring
Bank terminates you, then your chances of getting
another Sponsoring Bank to sponsor you are very
low indeed. This could make it very difficult
for you to ever get approved to accept credit
cards again. Remember, do not fall behind in
issuing refunds. The
fourth way to reduce chargebacks is to not submit
a deposit transaction until you already have,
or are ready to deliver the associated goods
or services. If you submit the deposit transaction
days or weeks before you deliver the goods, you
do two things.
Submitting
a Deposit
You
are accepting money from the Issuing bank that
is really not yours. Remember, because of the
way chargebacks work, the Net Settlement Amount
you receive from a deposit does not really "belong" to
you until you have satisfied the cardholder's
expectations. You have not even begun to satisfy
the cardholder's expectations until you deliver
your goods or services, and even then, they must
have the quality and features you have advertised.
You substantially increase your risk of a chargeback.
Issuing Banks are very good at including a
recent credit card charge on a Cardholder's credit
card statement. If you submit a deposit transaction
on Day 1, and this charge is near the end
of a billing cycle for the Cardholder, then the
Cardholder may see your charge on his statement
on Day 5, for example. If you have not delivered
your goods or services prior to Day 5 (in this
example), then you run the risk of annoying the
Cardholder (your customer), and in getting a
Retrieval Request. If you cannot honor the Retrieval
Request, and do not immediately submit a credit
transaction, then you will get a chargeback.
Retrieval Requests themselves cost you money
since you have to take time out to respond to
them. It is best to avoid them, and one good
way is to deliver goods and services very near
the time you submit the deposit transaction.The
fifth way to reduce chargebacks is to protect
your merchant id and terminal id. Your terminal-id
identifies you to your Processor. You do NOT
want anybody submitting transactions to your
Processor using your terminal-id without your
permission. Keep your transaction processing
equipment physically secured in your place of
business. Be sure that only authorized individuals
have access to that equipment at all times. If
you use Internet order-taking software, or contract
with an Internet service organization to accept
credit card orders over the Internet on your
behalf, then be sure your software and/or Internet
service organization keep your terminal-id absolutely
confidential. Also, qualify your Internet service
organization as being completely honest and reputable.
In particular, do not permit your terminal-id
to be exposed to Internet shoppers, even in hidden
HTML fields. In general, YOU are responsible
for all transactions submitted to your Processor
with your terminal-id, so manage its use as carefully
as you manage your bank accounts.The credit card
system offers measures of protection to both
the Credit Card Merchant and to the Cardholder.
To the Credit Card Merchant, the protection is
offered by the Issuing Bank who represents that
if the Credit Card Merchant fulfills his bargain,
then the Merchant will receive (and get to keep)
the Net Settlement Amount. To the Cardholder,
the protection is that if the Merchant does not
fulfill his bargain, then the Cardholder will
not be out the price of the merchandise. This
is easy for the Issuing Bank to enforce, since
the Issuing Bank will just charge back your account
for the Transaction Amount.The Issuing Bank
is the friend of the Cardholder. The Issuing
Bank provides a credit line to the cardholder,
and protects the cardholder from merchants that
do not fulfill their part of the bargain.Your
Processor and Sponsoring Bank are your friends.
They sponsor you as a Credit Card Merchant that
will fulfill your part of the credit card transaction
bargain, they provide the system that gets the
funds from the Issuing Bank, and puts them in
your bank account after you submit a deposit
transaction, they work with you to make sure
you respond to retrieval requests in a timely
fashion, and if you do get a chargeback, they
will work with you to try to reverse it if you
have presented the necessary documentation, and
have the proof of shipment and delivery and meeting
the Cardholder's expectations.In return for this
support, your Processor and Sponsoring Bank
expects you to rigorously and honestly convey
accurate information to your potential customers
(thereby setting expectations), and then to diligently
fulfill those expectations. From the Processor's
point of view, this translates into four main
questions:
- Are you fulfilling your shipment dates
and quality commitments according to the
expectations you have set in the mind of
your credit card customers?Are you promptly
responding to Cardholder requested returns
and refunds according to your policy, and
submitting the appropriate credit transactions
to your Processor?Are you doing everything
you can to verify that the credit card
numbers you are accepting for your goods
and services are from the actual Cardholders,
and not from someone else that happens
to know the card number?
- Are you meeting the terms of your agreement with your Processor regarding charging the card and timing of delivery?
From time to time, your Processor or Sponsoring Bank may ask you to provide an honest assessment of your performance against these questions. Your answers to
these questions sets expectations by your Processor and Sponsoring bank regarding the number of retrieval requests and chargebacks you may be getting in the future. Your answers may result in your Processor or
Sponsoring Bank requesting some reserves against your account, but your answers serve to maintain your good relationship with your Processor. If your answers to these questions are inconsistent with your Processor's
processing, retrieval and chargeback experience with you, then you are running the risk of damaging your relationship with the organizations that are supporting you as a Credit Card Merchant.
One
final thought. The credit card system is optimized
towards card present, magnetically captured (e.g.
scanned by a card reader), near-immediate delivery,
deposit transactions with, or very soon after
authorization, and the same Transaction Amounts
submitted with both authorization and deposit
transactions. Deviations from this "optimized" view
of the world usually result in higher settlement
rates as dictated by the Visa/MasterCard system.
This could mean higher discount rates for you,
or additional settlement and transaction fees
that are billed to your account at the end of
the month. If your business deviates from this
optimized view, you just need to keep these facts
in mind so that you can factor these costs in
as part of doing business with credit cards.The
easier you can make it for your customer to pay
you, the more sales you will get. Credit Cards
are a convenient way for your customer's to finance
their purchases from you. Your Processor and
Sponsoring Bank are here to help you succeed
in your business, and that is why they are giving
you the opportunity to be a Credit Card Merchant.
Their trust in your integrity and honesty form
the basis of their relationship with you and
why they are on your side in the event of retrievals
and chargebacks.
We hope this guide has helped you in your decision
to start accepting credit cards.
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