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.

Even the best POS systems go down. It is not a matter of if, but when. Preparation and practice for this type of event is key. The best thing a business can do is to get ahead of the situation to mitigate the damage and reduce the financial impact.

Rather than business coming to a halt, it is best for the management team to have a plan in place. Management and staff should be aware of the backup process in the event they are left without a POS system. Below are some ideas one may want to cover if they are ever affected by a system down situation.

TROUBLESHOOTING THE INTERNET

Before contacting the point of sale or merchant processing company, the first thing the business will want to determine if it is it a network or POS issue. Some things to consider while troubleshooting:

1. Determine if the issue is internet or POS/server related? More times than not, an internet outage can be the culprit of major POS problems. A simple way to check the internet would be to simply try to open a website on a computer using the same network as your POS system. If the site has trouble opening, some steps for troubleshooting would be:
   1. Plug a laptop/computer directly into the modem provided by your Internet Service Provider (ISP).
      1. If internet issues still persist, try restarting the modem or contacting your ISP for resolution.
      2. If internet is available at the modem, try to access websites from a computer plugged into the router/switch provided by your POS provider or network specialist. A simple power cycle of the router/switch can correct a network issue, however it is highly recommended that this is done with the POS company on the phone.
2. If internet is available throughout the business, the next thing to determine if all terminals are affected or just one?
   1. If one terminal is affected, it may be something as simple as a loose cable either at the POS switch/router or at the terminal itself.
   2. If all terminals are affected and it is determined that it is not an internet issue, it would be best to involve the POS company at this point as it may be an issue involving the POS server or the router itself.

PUT A BACKUP PLAN IN PLACE

Not only should the business have a WRITTEN backup plan in place if it ever finds itself without a POS system, it also helps to make sure the entire staff is trained on how to handle a system-down situation. Some things to consider in your system-down procedures are:

Have a Handwritten System Documented and Put in Place

It is best to develop and have a handwritten ticket system documented before any major catastrophe hits. Management and employees should also periodically be trained on how to use this system.

• For restaurants, this will include steps for a manual ticket process. The staff should know how to create a ticket at the table, turned it into the kitchen, and total the check amount to bill the customer. It would be a good idea to have an inventory of manual tickets in stock that are numbered so all payments/orders can be accounted for at the end of the shift.
• For retail, it will help to record every sale with UPC/Skew number and cross reference these items on the credit card/cash slip provided to the customer.

Ask Your POS Company and Learn How to Use Offline Mode

Many POS systems support an offline mode for accepting credit cards while the internet or server is down. This allows the business to continue to run normally (including running credit cards through the system), however cards are only being stored in the system until the internet comes back online. The business does run the risk of accepting a card that declines at a later time, however the risk may outweigh the reward of not having to go to a manual process.

Alternative Sources for Accepting Credit Cards

Many merchant processing companies offer mobile payment/gateway solutions (For Example: MX Express) that will allow businesses to still authorize credit cards outside of the POS system. It would be a good idea to preemptively create all of the user accounts needed, log into each device, and record these usernames/passwords in a secure location. Businesses should also know which phone(s) will have the mobile payment app on them. Be sure to login and test the system periodically to make sure there are no surprises when the system is needed. Aside from the mobile payment piece, many merchant processors also provide a gateway (For Example: MX Merchant) that can be used online if mobile phones are not available.

Keep in mind that if payments are recorded in another application, such as authorizations on a mobile phone, they will need to be recorded in the POS system. It is best to have a payment method button on the POS system that will still close the table/check, record the order number, and track the payment type.

If a mobile payment or gateway option is not available from the merchant processor, the next best option is to have “knuckle busters” and payment slips available. Similar to offline mode, the merchant will run the risk of accepting a card that may be declined later.

Know Who to Call and for What

It is also a good idea to have a document available with important phone numbers for management to call in a system down situation. Resources to consider are:

• The point-of-sale company
  • Sales Rep Contact Info
  • Support Phone Number
  • Escalation (if available)
• Credit Card Company
  • Sales Rep Contact Info
  • Support Phone Number
  • Escalation (if available)
• Networking company
  • If available, company that installed the network system
• Voice Authorizations phone numbers for VISA, Mastercard, Discover, and American Express

Look into Failover/Backup Internet

Many companies offer internet over 4G that can be installed near the router/modem. In the event of an internet outage, the system will automatically detect the internet is down and rollover to the back up 4G signal. This is ideal as it will have minimum disruption to the operation and the merchant can continue to authorize credit cards.

If a situation ever comes up where the merchant finds themself without a point-of-sale, preparation and training will be key. Make sure everyone knows who is responsible for what and that the process is clearly documented and available. While hoping or the best is good, it is always best to prepare for the worst.

As expected, Visa and Mastercard have confirmed an April 2019 increase in interchange rates, the fee charged by banks that covers the cost of handling and credit risk inherent in a bank credit or debit card transaction. While they have not announced the amount of the increase, your merchants should expect to pay slightly more for their merchant processing in the coming months.

HOW INTERCHANGE FLUCTUATION AFFECTS YOUR MERCHANTS

The increase of interchange rates is not uncommon in the merchant processing industry, and the impact can be different from one merchant to the next depending on their ticket size and type of transactions they run. Some processors/partners, depending on the pricing structure they use for their merchants, can choose to eat the increased fees, while others pass the higher fees off to the merchants. Below are some examples of merchant pricing structures and how an increase in interchange can affect them:

1. Flat Rate Pricing– Flat rate pricing is one rate provided by the merchant processor/partner for all transaction types (manually keyed, swiped, moto, etc) and usually does not change when interchange fluctuates. Unless the merchant processor/partner decides to increase the merchant fees to offset the cost, a merchant on flat rate pricing will feel no effect of a rise in interchange rates.
2. 3 and 4 Tier Pricing– A merchant paying rates based on tiers will also not feel the effect of a rise in interchange. In this scenario, a merchant processor has given the merchant 3-4 rates based on the transaction type (i.e.- the merchant will experience a higher rate when a transaction is manually keyed as opposed to swiped/dipped). As interchange fluctuates, the tiers remain the same.
3. Interchange/Cost Plus Pricing- The most common rate structure offered by merchant processors, Cost Plus Pricing is based solely on the rate of interchange with an additional markup for the merchant processor. In this scenario, the merchant’s rate will fluctuate with interchange while the fees to the processor remain the same.

WHAT YOU AND YOUR MERCHANTS CAN DO

For merchants priced with Flat Rate and Tier Pricing, it is up to the merchant processor/partner to determine if they will eat the cost of the increase in interchange or pass the fees off to the merchant. Rather than a blanket rate increase, it is smart to adjust rates on a merchant by merchant basis.

For merchants on Interchange/Cost Plus Pricing, it is important to be upfront with the merchant about the change in rates and what it might mean for them. Make sure they understand that their fees (the merchant processor/partner fees) will remain the same, however the rate of Visa Mastercard will adjust.

PROACTIVE OPTIONS FOR THE MERCHANTS

If you sense aggravation about the inconsistency of rates, the good news is that there are available solutions for your merchants. For example, Cash Discounting has become a very popular solution. A Cash Discount Program is not a convenience fee or a surcharge. Merchant’s simply price their items at cash discount prices. When a customer chooses to pay with a credit or debit card, a non-cash price adjustment will be passed through to the customer and deposited in the merchant’s bank account the following day.

Here’s How it Works

For the sake of simplicity, let’s say the customer makes a $100 purchase and the merchant totals $50,000 in sales for the month. Below is an example of what to expect if the merchant were to charge a 4% Customer Service Fee.

Cash Discounting is not as simple as tacking on fees at the time of checkout. There are rules and regulations that must be followed, and it is important to use a processor that is familiar with the subject. To learn more about how to implement cash discount for your merchant, visit boldpayments.io/cash-discounting.