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May 14, 2007 • Issue 07:05:01

Card Association rules to work by – Part II

By David H. Press
Integrity Bankcard Consultants Inc.

Last month I answered some often asked questions about what is permitted for merchants under card Association rules and regulations. This month I am addressing more questions you, as ISOs and merchant level salespeople (MLSs), have asked about those requirements.

Malfunctioning magnetism

Some of you want to know if merchants can refuse to accept cards that do not swipe through their POS terminals.

Visa U.S.A.'s rules and regulations do not address this issue. So it would not be a violation to refuse to take a card that cannot swipe successfully. However, Visa requires merchants to make a manual imprint if they do process such transactions.

Remember, key-entered transactions are fully acceptable. But they are associated with higher fraud and charge-back rates. In addition, when transactions are key-entered, certain security features are not available, including verification of expiration date and Visa's Card Verification Value 2 program, which employs cryptography to enhance security.

Visa provides the following instructions to merchants for instances in which cards do not read when swiped:

  • Check the terminal to make sure that it is working properly and that you are swiping the card correctly.
  • If the terminal is OK, take a look at the card's security features to make sure the card is not counterfeit or has not been altered.
  • If the problem appears to be with the magnetic stripe, follow store procedures. You may be allowed to use the terminal's manual override feature to key-enter transaction data for authorization. Or you may need to make a call to your voice-authorization center.
  • For key-entered or voice-authorized transactions, make an imprint of the front of the card. The imprint proves the card was present at the POS and protects your business from potential chargebacks if the transaction turns out to be fraudulent.

    The imprint can be made either on the sales receipt generated by the terminal or on a separate manual sales receipt form signed by the customer.

For more information about situations in which magnetic strips cannot be read, see page 21 of the Rules for Visa Merchants: Card Acceptance and Chargeback Management Guidelines. The document is available on Visa's Web site at www.usa.visa.com/download/merchants/rules_for_visa_merchants.pdf.

Dirty laundering

ISOs and MLSs have also asked whether merchants can process transactions for additional businesses they, their spouses or friends may own.

The answer is no. Merchants should deposit transactions only for the business bound by the applicable merchant agreement. Depositing transactions for any other business is called laundering, or factoring, and is not allowed. It is a form of fraud associated with high chargeback rates.

Factoring usually occurs when a merchant is approached by a third party to run transactions on its behalf. The merchant then pays the money to the third party and gets stuck for the chargebacks.

Retailers that factor usually lose the right to process credit cards and can be added to the Member Alert to Control High-Risk database. Called the MATCH list, it contains information on terminated merchants. You should set up a separate account for each business that will be accepting bankcard payments (and make more money, too).

Surreptitious splits

Merchants often think they can make multiple charges on a card to complete a sale. This is called a split sale and is very risky to merchants.

Visa advises merchants to prepare one sales receipt per transaction, using the full transaction amount. Retailers are not allowed to split the cost of a single transaction between two or more sales receipts, using a single cardholder account, to avoid authorization limits or declines.

Volatile violations

To help resolve rule violations that may not be covered under their chargeback rules, the card Associations have established the compliance process, which offers members another dispute resolution option.

For example, the Visa compliance process can be used when all of the following conditions are met:

  • A violation of Visa's operating regulations occurred.
  • The violation is not covered by a specific chargeback right.
  • The member incurred a financial loss as a direct result of the violation.
  • And the member would not have incurred the financial loss if the regulation had been followed.

Many compliance violations are listed for merchants as prohibited. Following are some of the most common compliance violations:

  • A cardholder stays at a lodging merchant and is also billed a no-show fee from the same location, for the same date.
  • A merchant adds a surcharge for using a credit card as a means of payment.
  • A merchant bills a cardholder for a delinquent account or for the collection of a dishonored check.
  • A merchant reposts a charge after the issuer initiated a chargeback.
  • A merchant insists that a cardholder sign a blank sales draft before the final dollar amount is known.
  • The cardholder is billed for an advance deposit, and the deposit amount is not applied toward the balance of the stay.
  • A merchant engages in factoring (processing transactions for another merchant).
  • A cardholder cancels an airline transaction, and the merchant fails to issue credit or prove that proper disclosure of cancellation policies was given to the cardholder at the time of the transaction.
  • A cardholder arrives at a lodging merchant, leaves within a reasonable time due to the poor quality of the accommodation but is still charged for the lodging.
  • A merchant fails to properly disclose its return policy to the cardholder at the time of the transaction.
  • A merchant fails to compare the signature on the card to the signature on the transaction receipt.
  • And finally a compliance right that is beneficial to merchants: A cardholder is credited more than once for the same transaction, or both a return and a chargeback occur for the same transaction.

The last compliance right listed can be very valuable to merchants. Yet, it is underutilized. Almost every high-chargeback merchant whom banks and ISOs ask me to review has a large number of chargebacks post for transactions in which the merchant has issued returns.

end of article

David H. Press is Principal and President of Integrity Bankcard Consultants Inc. Call him at 630-637-4010, e-mail dhpress@ibc411.com or visit www.ibc411.com.

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

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