Visa Authorization Data Penalty Assessment
Forced Deposits, and Data Conditioning
Commencing on July 1, 2009, Visa® will be implementing another “penalty” assessment aimed at merchants (and their processors) that run sub-par credit card operations or worse yet, utilize “forced deposits.” The fee will be assessed on any settlement transaction that is submitted without all of the proper authorization data. This fee will be $0.10 per transaction.
It will be interesting to see how this new regulation plays out. Most merchants shouldn’t be affected by this rule, assuming that they have been passing the correct data all along. The question is what is the correct data? Considering the vast number of acquirers, processors, gateways and other middlemen issuing merchant accounts, the answer might be surprising. In virtually all cases, at least two players stand between the merchant and the card-issuing bank, which generally provides the authorization approval. In this simplest case, the players would be either a Third Party Processor (TPP) or a Member Bank and the Visa network itself. In many cases, merchants use a gateway, introducing yet another layer of integration.
While there are distinct differences between gateways and TPPs, they both have the potential to harm authorization data. An important electrical engineering principle states that whenever you add a component into a circuit, it adds some level of “noise.” Although not a perfect analogy, this principle does apply to data processing in the payments industry. Every time you add a new player to the mix, you introduce the possibility of generating noise. In this case, the noise is generally created by the introduction of new data formats and connectivity methods. For instance, your system must use an Application Programming Interface (API) to convert the data to a format the gateway understands, and the gateway must then convert the data to a format your payment processor understands using yet another API. In this situation, it is not uncommon for data elements to change along the way. In some cases, certain data elements may be lost altogether.
While the Associations have specific rules governing the processing of authorizations, there is certainly some level of “forgiveness.” Namely, if a merchant submits a settlement missing certain authorization data or they settle in an untimely fashion, the transaction may process just fine. This merchant may end up paying a higher Interchange rate, but at least the sale will be completed. Incidentally, this increase in Interchange would probably exceed the new $0.10 assessment. Under this new regulation, Visa might not be so forgiving, scrutinizing every transaction and handing out a lot of penalties (and generating a lot of revenue for shareholders.) Only time will tell. So, the prudent action here is to scrutinize your merchant account statements after the July implementation date.
Some merchants can be very aggressive in the way they bill their customers. A case in point involves merchants that utilize recurring or multi-pay billing options for their products and services. As the billing series ages, it becomes more difficult to obtain authorization approvals. This is mostly due to card expiration and other factors relating to the card number or issuing bank. In these aggressive cases, the merchants will submit sales deposits without obtaining a proper approval. Known as a “forced deposit,” these settlements complete at a surprisingly high rate. Interchange qualification is usually abysmal, however, this cost pales in comparison to the value of the completed sales, making this an enticing option for merchants. Forcing deposits is prohibited under the regulations, and TheMerchantsguide.com strongly recommends that merchants avoid this practice. One might wonder why the Associations or card-issuers simply program the system to reject these transactions and stop the practice altogether?
One answer might be that they are not strongly compelled to do so. MasterCard® for instance, will issue a “technical chargeback” against merchants for all forced settlements that fail due to invalid card numbers, insufficient credit, and other factors. The fine for such a chargeback is $25.00. These fines generate revenue for the Associations. Successful forced deposits also increase the cardholders account balance providing issuers with an opportunity to earn more interest. Capitalism certainly forges unusual equilibriums! Consider that the Associations are within their rights to terminate these merchants because they are breaking the regulations. In extreme cases of abuse, these merchants will be warned, and eventually terminated. In general, however, the Associations rely on the high chargeback rates this practice generates to discipline and expel merchants.
Depending on the merchant’s Average Ticket Value (ATV), the increase in revenue through forced depositing may offset the cost of technical chargebacks. Until now, Visa had no such fine system. When a merchant’s ATV does not offset the MasterCard fines, they simply limit their forced deposit activity to Visa transactions. Pretty crafty, huh? This party’s now over. Unlike the MasterCard scheme which fines only rejected sales transactions, Visa’s $0.10 fee will apply to every forced deposit. Still, it is hard to see this small fee offsetting the revenue upside of forced deposits. So it is likely that these rogue merchants will continue the practice while Visa takes a piece of the action as well.