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The ABC's of Credit
Card Processing
An Introduction to Credit Card
Processing
Maybe you've just
opened shop. Or maybe you've been in business for years. Either way, if
you're about to accept credit cards from your customers you're in good
company.
Here's why:
- It's easier for
your customers to pay you. Plus, they often spend more.
- You can accept
orders by telephone or Internet.
- Your business
enjoys enhanced credibility.
This
article will
help you get the most from credit card processing. It explains your responsibilities…
and how to control the risks. (Yes, there are risks.)
Definitions
of Credit Card Processing:
Every business has its vocabulary. This is ours, starting with the parties
in transactions:
- Your customer,
the "Cardholder," obtains his/her MasterCard or Visa credit card
from an "Issuing Bank" (the bank that issued the card to the
Cardholder).
- You, the merchant,
obtain your "Merchant Account" from a "Sponsoring Bank"
or an "Acquiring Bank" (both referred to as "Merchant Banks").
Merchant banks "sponsor" you as a business qualified to accept
credit cards.
- "Processors"
are companies such as ECHO that process the credit card transactions
through the bank system for you. Merchant banks use us as a third-party
service
- The "Net Settlement
Amount" is the amount deposited into your account after a sale.
It's the transaction amount less the "Discount Amount." The discount
amount based on your "Discount Rate," a small percentage of each credit
card sale set by ECHO .
- "Pass-through
fees" are an occasional fact of life. They're the fees added on
your basic discount rate by Visa and MasterCard whenever a transaction
didn't meet certain requirements for your basic transaction (such as
failure to use the Address Verification Service (AVS)). These "pass
through" fees are not imposed by ECHO.
- In general, credit
cards are processed as "magnetic" transactions or "non-magnetic."
Magnetic means that the card is swiped through a POS terminal in a face-to-face
or "card present" transaction. It is the safest and cheapest processing
option. On the other hand, non-magnetic transactions (aka "key-entered")
are those used in mail-order/telephone-order, Internet, or telephone
processing, where cards aren't present.
Credit
Card Processing in Five Easy Steps
When a credit card
is used for payment, the following process occurs (usually in a matter
of seconds!):
1. You submit an
"Authorization Request" to ECHO with a point-of-sale (POS) terminal,
PC software, telephone, Internet, etc.
2. ECHO electronically
links to the Visa/MasterCard network to transmit the authorization request
to the issuing bank.
3. The bank verifies
that the account number is valid and that the transaction amount does
not exceed the cardholder's credit limit. The authorization also puts
a "hold" for the funds on the cardholder's credit limit.
4. You transmit
a deposit transaction which initiates the settlement of funds. Note:
If you are operating face-to face with customers and deliver the merchandise
or service immediately, the authorization and deposit occur simultaneously
as a "sale" transaction.
5. ECHO instructs
the issuing bank to deposit the net settlement amount into your bank
account.
Responsibilities
and Rewards
You've seen how transactions
work. Now we'll step back and review what keeps the whole credit card
system together, namely:
- Built-in Protections
- Trust
Protection
Credit cards
offer protection for you, your customers, and the banks involved. In fact,
protection is why credit cards are safer for everyone.
MERCHANTS
When you accept a
credit card (and the transaction is authorized) you can be sure you'll
receive the funds. (Later, we'll discuss disputes where funds go back
to the consumer.)
BANKS
The credit card system
protects issuing banks from unscrupulous merchants. When you submit a
deposit, you are promising the issuing bank that you have delivered the
goods and services promised to the cardholder. If you don't, the issuing
bank has the right to charge back the transaction.
CONSUMERS
Cardholders are protected
from merchants who fail to keep their promises. They're not liable for
payment if a merchant fails to deliver as expected.
Trust
Trust holds the credit
card world together. The issuing bank doesn't ask a cardholder if he is
satisfied before you get your money. They TRUST that the cardholder will
be satisfied. Here's how you earn that trust: When you sell by credit
card, you must deliver on the cardholder's "expectations" (note that word!)
of your goods and services.
"What expectations?"
Think about it. Either by policy or by practice, implicitly or explicitly,
you tell customers that they can expect a level of quality, delivery times,
etc. By accepting a credit card for payment, you are promising the issuing
bank that you are going to "make good" on those expectations. If not,
your customer can get his money back
Chargebacks:
Customers Wanting Their Money Back
Almost everyone
has an idea how a credit card sale works. But even some experienced merchants
don't know the other side of the system: Chargebacks. Understanding chargebacks
can save you a lot of money, and help to salvage customer relationships.
If a cardholder believes
a charge isn't legitimate, or her expectations weren't met by the good
or service provided, she could come to you for a refund. But she has another,
more troublesome, option: Chargebacks.
Here's how chargebacks
work: Regardless of merit, the issuing bank is obligated to investigate
complaints from cardholders, including:
- You never delivered
the goods and services you promised her.
- She never ordered
the goods that showed up on her credit card bill.
- She received the
goods and services, but they didn't meet her expectations, so she wants
a refund.
In these circumstances,
the issuing bank initiates a Retrieval Request and/or a Chargeback to
resolve the matter.
Some
Common Causes of Chargebacks
Some
common causes of chargebacks can be avoided easily:
Step
One in Credit Card Disputes: Retrieval Requests
Traditionally, the
dispute process begins with a Retrieval Request that asks for documentation.
1. The issuing bank
sends a Retrieval Request (often called simply "retrieval") to ECHO.
(Sometimes, they start with a chargeback and skip the retrieval request
altogether.)
2. ECHO sends the
retrieval to you. The retrieval asks for proof that you delivered the
disputed goods or services to the cardholder.
3. When you provide
proof that you delivered the goods or services to the cardholder, ECHO
forwards it to the issuing bank that informs the cardholder. The proof
is usually a document (delivery receipt, credit card receipt and/or
your store receipt) signed by the cardholder TIP: Reply PROMPTLY to
these requests. Late responses almost always result in chargebacks.
4. At this point,
the complaint is usually dropped (but not always)
Chargebacks:
When You Can't Prove the Customer Wrong
If you don't have
documents for the retrieval, or if you don't deliver a copy of the documents
to your processor in time, the cardholder is deemed to be right. When
this happens several things occur:
1. The issuing bank
submits a chargeback to your processor through the Visa/MasterCard network.
2. Visa/MasterCard
debits the original transaction amount from your bank account. (Or,
it is deducted from your most recent deposit transactions).
3. Your sponsoring
bank records the chargeback on your account record.
Besides the obvious
financial loss to you, chargebacks are also bad because of that final
step. Here's why.
Everyone in the credit
card system knows that eventually a few transactions will result in chargebacks.
They're a cost of doing business.
But, if you cause
too many chargebacks, the credit card system will start to doubt you and
your standing as a credit card merchant. When chargebacks become too prevalent,
your merchant account may be terminated by your sponsoring bank. Then
you may find it impossible to find another sponsoring bank. In other words,
no more credit card acceptance. Ouch!
Chargebacks
and Timing
In most cases, chargebacks
must be initiated within 120 days of the original transaction.
However if a merchant
is alleged to have violated Visa or MasterCard rules, a "compliance" case
can be disputed up to 180 days after the rules violation.
Preventing
Fraud: The Best Way to Avoid Chargebacks
Preventing credit
card losses is not only good for you, but it is also part of your responsibility.
Here are some general guidelines on how to prevent fraud and avoid chargeback
situations. For more information, ask for our booklet, "10 Plus Ways to
Beat Credit Card Crooks."
- Make sure that
the credit card is from the legitimate cardholder… not just someone
who knows the card number, or has stolen the actual card
- Verify signatures
(for face-to-face transactions) on the card and on the receipt signed
by the customer
- Take special care
with non-magnetic transactions like telephone orders, mail orders or
Internet orders.
- If applicable,
use the Address Verification System and verify the Security Codes (also
known as "Validation Codes") on the card (this prevents many pass-through
fees).
- Obtain a signed
receipt from the cardholder and, if applicable, a signed proof of delivery
from the shipper for delivered goods.
- Protect your merchant
ID and terminal ID so no one submits transactions without your permission.
More
Tips to Avoid Chargebacks
- Make sure shoppers
know your warranty and return policy. Make sure YOU consistently live
up to it. When consumers can resolve problems directly with you, you
avoid the hassles of dealing with chargebacks.
- If you have a
"no refund policy," the customer must acknowledge this with a signature.
The words "No Refunds" must be printed at least ¼" high and be within
¼" from the signature space.
- Do not submit a
deposit transaction until you deliver the goods or services.
- If you rent equipment
or sporting goods, do not attempt to cover damage to your products by
charging the customer's credit card without doing the following: You
must run a separate transaction for the damage after swiping the card
again and having the customer sign a separate sales draft and invoice
for the damage claim. You must never attempt to charge for damage or
loss using only the credit card draft obtained when performing your
rental transaction… NEVER
Keys
to Keeping a Good Account Status
Your processor and
sponsoring bank expect you to be honest with your customers (thereby managing
"expectations"). And you're expected to live up to your bargain. This
translates into four requirements:
- Fulfill your shipment
dates and commitments to your customers.
- Promptly respond
to requests for refunds according to your policy and submit the appropriate
credit transactions to your processor. Do not refund a customer with
a check or cash.
- Prevent fraud.
- Only charge cardholders
after delivery of the goods or services.
ECHO supports its
merchant customers with round-the-clock access to highly-qualified assistance.
To reach customer support:
- Call 800-262-3246
- Press "1" for Customer
Support or to order additional supplies
- Press "6" for Chargeback
assistance
- Press "7" for Fraud
Prevention assistance
- Press "5" for
information about new products or services
A
Closer Look at How to Conduct Credit Card Transactions
Rule No.1:
Every sale requires both an authorization and a deposit.
Rule No.2: Always
note the Authorization Code.
An Authorization Code
indicates that the cardholder has the credit to pay for the purchase.
This assures you of payment, as long as
- A valid card was
used by the authorized cardholder.
- The cardholder
(not someone else) has signed a sales draft.
- The signature on
the sales draft was matched against the signature on the back of the
card.
- You have proof
that the card was present ( a receipt created by your printer as the
result of a magnetic stripe read, or an imprint of the card created
by your imprinter). You won't have this for mail-order, telephone-order,
etc., increasing the risk.
- The transaction
is not disputed later by the cardholder. (If this happens, you'll have
to fight for your money through the chargeback process.)
When the goods or
services are provided at the time of the sale, the authorization and deposit
are simultaneous. However, if the customer is paying hours or days before
she'll receive the goods or services, process the authorization first.
This reserves the amount from the cardholder's credit balance for you.
Perform the deposit transaction when the goods or services are delivered.
TIP: To avoid a pass-through
fee on the transaction, make sure you deposit as soon as possible after
the goods are delivered. After three days, the pass-through will be applied
but that's no excuse to make the deposit before the goods are shipped.
Do not wait longer than 7 days, or you'll need to obtain a new authorization.
DEPOSITS
Deposits take funds
from the cardholder's credit line and deposit them into your account.
For an in-store purchase, the deposit is simultaneous with the authorization
(unless the goods will be delivered at a later date). With in-store processing
provided by ECHO, this is a single sale transaction.
Remember: In mail-order
or telephone- order business (MOTO), the deposit must not be run until
the goods are shipped.
When Are Funds Available?
We thought you'd ask. Visa/MasterCard funds are posted to accounts two
business-days after the date of the transaction.
Handling
Sales Drafts
A sales draft is a
legal and binding contract between you and your customer. If you have
a retail store, a sales draft must be completed and imprinted for every
credit card sale. So, even if you're not using a POS terminal that prints
a draft for you, you should still imprint the card and obtain a customer
signature on a sales draft, an ECHOtel™ processing form.
For your protection,
a manual imprinter can be used to imprint the credit card when any of
the following are true:
- You're not using
a POS terminal
- You have to manually
enter (not swipe) the credit card information into your POS terminal
" You do not have a POS printer.
Information that
MUST be on a Sales Draft
- Credit card number
(recorded from the card's magnetic strip or imprinted)
- Authorization Code
and Reference Numbers
- Signature of customer
- Card expiration
date
- Date of sale
- Amount of sale,
including tax
- Description of
goods/services
Storage
of Sales Drafts
Keep drafts
in a secure manner for three years (even if you sell your business). Check
with your accountant for guidance before destroying them. In case of a
chargeback, you may be required to produce sales drafts quickly, so file
them so they're easy to find.
TIP: Keep the white
copy of all receipts: They photocopy better. Also, handle carbonless paper
and carbon/silver-back paper carefully. Pressure on the paper during handling
causes black blotches that make your documents illegible.
TIP: You will be asked
to find chargeback documentation based on the card number, transaction
date, and the amount of the transaction. Therefore, filing your retrievals
by cardholder name will make your research process more difficult unless
you also have a cross-reference system.
IMPORTANT: Storing
and destroying of sales drafts must be done in a secure manner to avoid
the credit card information being stolen.
Protecting
Cardholder Information
We've all heard about
companies who have become victims of thieves who steal credit card information
stored by merchants. To avoid this, your responsibilities to safeguard
data include the following:
- Don't share, sell,
purchase or exchange cardholder names and account numbers in any form.
If you are mailing or emailing an invoice or other transaction data
to a customer, do not show any credit card data except, if necessary,
the last four digits of the card number.
- Secure all records,
electronic or otherwise, that include cardholder names, account information,
transaction information etc. to prevent access by anyone other than
your processor.
- Never store magnetic
stripe data.
In the electronic
commerce arena, a number of best practices to help protect data from unauthorized
access include:
- Encrypt cardholder
data and only store that data in encrypted form.
- Back up files
only in encrypted form.
- Secure encryption
and communication keys in a secure hardware device or tamper-resistant
security module.
- Limit personnel
access to computers.
- Encrypt and decrypt
within a secure hardware device. This isolates the encryption keys and
minimizes their exposure.
- Manage all keys
using split knowledge and dual control so no one person can have access
to data in the absence of other employees.
- Protect access
to file servers
Watch for Skimming!
Skimming is the act
of capturing card data and then using the data to create counterfeit credit
cards, or to make purchases. Typically, a crooked employee such as a store
clerk or restaurant waiter will use a small device, such as a Personal
Digital Assistant equipped with a card reader, to swipe a customer's card
when no one is looking. The data can then be re-injected onto a magnetic
stripe on a fraudulent card.
While skimming is
often a high-tech endeavor, it has a low-tech angle as well. Simply put,
an employee who gathers credit card information and writes it down is
just as much of a threat as his tech-savvy counterpart.
Prevent this from
happening. MasterCard will assess fines on merchants who are determined
to be a "point of weakness" in preventing employee fraud.
Meanwhile, Visa pays
a reward of $1,000 to anyone who provides information leading to the arrest
of a "skimmer," so it can literally pay to be vigilant about employee
fraud.
Balancing
and Reports
You should
review your credit card drafts at the end of each day or the beginning
of the following day. No matter how reliable your processor (and we are
reliable), you want to make sure that each transaction was properly processed.
This can save you lots of grief at the end of the month, and help ensure
you're getting proper credit for your sales.
Compare the total
dollar amount of the drafts to the total amount you processed for the
day. If you have a POS terminal printer, you can print both detail and
summary reports of your day's transactions. For our other processing options,
information can be obtained by using our online reporting service or by
calling Customer Support at (800) 262-3246.
Your
Merchant Accounts and Your Bank Deposits
Funds are deposited
automatically to your sponsoring bank account. We recommend you always
leave a balance in your bank account as a "buffer" to ensure funds are
available for monthly transaction fees, chargebacks, etc.
Each day's Visa/Master
Card transaction total will appear on your bank statement as a deposit
described as "ECHO V/MC Trans." Since your Visa/MasterCard discount fee
is deducted daily, the deposit shown is your net deposit.
Discover and American
Express deposits are listed separately. Your processing agreements with
these companies control the payment of your funds.
ECHO
Billing
At ECHO you will receive
a Monthly Statement ("Automatic Deduction Notice") detailing the month's
total debit to your account. That debit to your bank account occurs on
the first banking day of each month for ECHO's transaction fees, Visa/MasterCard
pass-through fees, supplies, etc.
Electronic
Clearing House., Inc.
730 Paseo Camarillo
Camarillo, California 93010
1-800-262-3246,
ext. 5
Merchants are sponsored
by First Regional Bank, Agoura Hills, CA Member FDIC
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