There are a number of reasons a merchant can experience a credit card hold/reserve. There are also a number of things merchants can do to prevent this headache.

Knowing the basics of credit card reserves and holds can save merchants quite a bit of frustration and hopefully help them avoid experiencing a delay when receiving their funds.

WHAT IS THE DIFFERENCE BETWEEN AN ACCOUNT RESERVE AND FUNDS WITHHELD (HOLD)?

Account Reserve is money set aside as a security deposit. It is usually due to the nature of the business (i.e.- a business at a high risk for chargebacks). When a processor determines a reserve is needed, it is common for the processor to hold a percentage of the merchant’s batches until a predetermined amount is reached.

Funds Withheld (Holds) take place when red flags are triggered by an unusual transaction type and the merchant processor holds the funds until further research is done or the chargeback deadline has passed.

WHY DO ACCOUNT RESERVES AND HOLDS EXIST?

Acquiring Banks (the merchant processor) are basically a line of credit until the chargeback time limit expires (at which point the card holder can not refute the transaction. Learn More About Chargebacks Here). If the cardholder disputes the charge, the merchant processor can use the reserve/hold to repay the consumer rather than try to recoup the amount from the merchant directly.

WHO DECIDES WHAT FOR A MERCHANT ACCOUNT RESERVE

Ultimately, it is the merchant processor that takes on the risk for merchant processing by funding merchants for transactions that can be disputed at a later date. It is up to the merchant processor to decide the parameters for the account reserve and sometimes looks at it as a case-by-case scenario (i.e.- length of time the merchant has been processing, the goods sold, chargeback history, etc).

Reserves

It is typical for high-risk merchants to need a reserve, and the processor can require a reserve as soon as the merchant begins processing.

Holds

The merchant processor can put a hold on an account based on an individual transaction that may look out of the ordinary (uncommonly high tip, larger than usual transaction, etc). When a merchant first signs up for merchant processing the merchant processor requests the expected average monthly volume, average ticket size, and highest projected ticket amount. The processor can use these queues to setup red flags in their system to identify unusual credit card activity. For example, if a restaurant claims their highest ticket is $1,000 but runs a $2,500 transaction for a catering order, the merchant processor will review that transaction and determine if a hold is needed until the chargeback deadline is cleared.

HOW MERCHANTS CAN PREVENT RESERVES AND HOLDS

Set the right expectations up front

When deciding the average ticket/monthly volume and the high ticket amount, it is important to be as accurate as possible to reduce any unnecessary red flags while processing. Merchants will also want to confirm their SIC Code (a four-digit codes that categorize companies by the type of business activities they engage in) is correct at the time of their application boarding. The wrong SIC code may categorize them as a high risk merchant resulting in unnecessary reserves.

Be upfront with the processor about the nature of the business

It helps to provide as much information as possible during the boarding process. Previous statements, chargeback history, business history, etc all can benefit the merchant by building credibility with the processor. Don’t lose hope if the processor requests a reserve on the account. Depending on the processor, the merchant can sometimes provide additional information at the time of approval to either avoid the reserve or lessen the amount requested.

Notify the processor about unusual transactions before they are batched

The best way to avoid holds on individual transactions is to notify the processor before the transaction is authorized and batched. It is typical for the processor to request either a signed invoice or a back story of the transaction. The risk department will take note of the transaction and usually fund the merchant for the full amount with the correct documentation.

While not ideal, reserves and holds are a necessary “evil” when it comes to keeping the merchant and processor safe from losing money. It is important for merchants to talk to their processor to find out what they require and to confirm the parameters they have on file are accurate based on the volume that is ran.

As POS and credit card technology changes, so do the requirements from Visa, MasterCard, Discover, and American Express. Merchants rely on their merchant processor more than ever for information on how to remain compliant with bankcard regulations. Doing so can help the merchant avoid chargebacks and fees passed down from the four major card brands.

MINIMUM PURCHASE AMOUNTS

Merchants are allowed to require a minimum amount in order to run a credit card, however there are a couple rules they should know:

1. The required minimum amount for any credit card transaction cannot be more then $10

2. Merchants cannot require a min amount on debit transactions.

3. Requiring a min on debit can result into being reported to card brands.

   1. First offense – formal request that the practice is stopped

   2. Second offense- Results in a fine

   3. A third offense could result in the merchant being blacklisted from running future transactions.

REQUESTING CUSTOMER IDS

 Merchants can require a customer to see ID with a few guidelines they must follow:

1. If the customer’s ID does not match the name on the card, the merchant can refuse to accept the card.

2. If the customer does not have or is unwilling to present an ID, the merchant should honor the card if there is proof of card presence, a valid authorization, and a valid pin and signature.

MERCHANT MCC CODES

In order to avoid confusion and issues running credit card transactions, merchants should make sure they are classified under the correct MCC Code when signing up with their merchant processor.

1. An MCC Code is a four digit code that categorizes the merchant’s business and dictates their interchange rate and the card types they are allowed to run.

2. These codes are also used for activity tracking, reporting, and risk management

3. Merchant should verify that they are classified correctly. If they fall under two different MCC Codes, they should use the MCC Code that has the highest volume or activate two merchant accounts.

PARTIAL AUTHORIZATIONS

Partial Authorization Defined (TSYS): A partial authorization occurs when a payment card authorization is attempted for a transaction and there are not enough funds available in the account to cover the full amount. The issuer returns an authorization for the amount available in the account, leaving the merchant to obtain an additional form of payment from the customer for the balance.

The simple answer for all pre-authorizations is that all credit card machines and point-of-sale systems are required to take partial authorizations in order to be compliant. Card brand rules include:

1. Discover requires that you take partial authorizations for all merchant category types

2. Visa and MasterCard requires pre-authorizations for only certain  MCC Codes 5812 (eating places and restaurants) and 5814 (fast food restaurants)

3. Card brands do not allow there to be machines that can disable partial authorizations.

4. If the sale is greater than the partial authorization (for example: if the partial auth is $5 and the merchant adds a tip resulting in a transaction amount greater than the available funds), the transaction can be disputed by the cardholder for incorrect charge since the partial authorization is only $5.

Additional References:
Visa Rules and Regulations
MasterCard Rules and Regulations

The topic of EMV is not new among the POS and merchant processing industry. But while the discussion has lost a bit of steam, the opportunity for merchant processing and point-of-sale vendors hasn’t.

It is no secret that the adoption rate for EMV has been slower than expected. What is more surprising is the number of merchants who still do not understand what EMV is or the risks that are involved with not accepting chip cards. The industry as a whole has seen an influx of fraudulent chargebacks due to consumers who are now savvy enough to identify merchants who do not accept EMV. Cardholders looking to take advantage of merchants who still swipe has become more common costing merchants millions of dollars a year in indisputable chargebacks.

EMV BY THE NUMBERS

Since the EMV liability shift in October 2015, the EMV conversion rate among merchants has been slower than expected. According to EMVCo, the percentage of card present EMV transactions for the year of 2018 stood at 53.5%, an increase from 41.2% in 2017.  This is much different than the transaction rates in Canada and Mexico they are more than 93%.

WHY HAVEN’T MERCHANTS SWITCHED?

For many merchants, the thought of installing machines and changing their business practice can seem daunting and expensive. It is common for some merchants to have looked into implementing EMV only to find out that their POS will require a costly upgrade. The best approach for these types of merchants is education. It is important for them to know there are options available that will fit their budget and eliminate a bulk of their chargebacks.

HOW TO EDUCATE MERCHANTS ABOUT EMV

The first thing a merchant must understand is that implementing EMV does not have to be as costly as their POS company might have quoted them. It helps if the merchant familiarizes themselves with EMV and understands the risks and costs associated not accepting chip and pin transactions.

First, What is EMV and Why is it Important?

EMV is a global standard for credit cards that uses computer chips to authenticate rather than the magnetic strip on the back of the credit card. Unlike the magnetic strip, the information on the EMV chip is encrypted and virtually impossible to replicate. This reduces the risk of fraudulent cards being created.

After the liability shift in 2015, issuing banks who categorize transactions as fraudulent immediately look to see how the card was accepted. If the card was swiped at the POS/credit card terminal, the bank will immediately rule in the cardholder’s favor leaving the merchant unable to fight the chargeback. If the card was “dipped” (an EMV transaction”), the cardholder can not rule the charge as fraudulent as the merchant tool the necessary steps to eliminate the risk, and a chargeback will not be issued.

Understanding the Return on Investment

Before you look into the best way to implement EMV, it would be best to understand the merchant’s return on investment. What is their average ticket size? Monthly volume? Number of chargebacks they see a month? For some low volume merchants, you may find the cost of implementing EMV does not justify the savings of avoiding chargebacks. But for the majority of merchants, the savings can be exponential over time.

For example, say a merchant who does $20K a month in volume with an average ticket of $30 sees four fraudulent chargebacks a month. The inability to fight these chargebacks could result in $120 a month in lost revenue and another $80 in chargeback fees. Not to mention, there is a trend where consumers are taking advantage of merchants and running up large tabs then simply calling in a fraudulent transaction leaving the merchant left covering the bill. For these types of merchants, the cost of EMV terminals would pay for themselves over the course of 2-3 months.

Ease of Implementation

The merchant must know is that there are options for implementation that more than likely fit their budget.

Point of Sale- Semi-Integrated

The majority POS systems offer semi-integrated solutions (a separate pin pad next to the POS machine for running credit cards). There are many benefits to this as the merchant is still able to run transactions through their system and the POS is taken “out-of-scope” when it comes to PCI requirements. You can learn more about semi-integrated solutions in the Pax Integration FAQs on BOLD’s University page.

Point of Sale- Non-Integrated

If the merchant is running a POS that does not offer EMV in a semi-integrated environment, there are also options to run the credit cards on a separate machine outside of the point-of-sale. While this is not ideal and can alter their business process/reporting, it does offer a cost-effective approach to avoiding chargebacks.

Stand Alone Terminals

If the merchant does not use a POS system, it is important for them to know that the cost for EMV enabled terminals is minimal. Many merchant processors and POS companies offer the credit card hardware for free as an added benefit of going with their merchant services.

Merchants have begun to feel the effect of and are looking for choices. It is a good time to open up a discussion with businesses looking for a change by offering information and solutions that fit their needs and budget.

If you have more questions about EMV or are interested in the hardware/software packages that we provide our partners, feel free to fill out the form below and a BOLD. representative will contact you shortly.