A common problem in F&B industry is dealing with payment card issues related to running tabs and adjusting tips. Recent developments require F&B establishments (F&B) to evaluate their current procedures.
Two new card company fees (effective October 2009) to consider:
With these new fees, F&B will need to research how their POS systems operate and how their merchant provider bills. Issues to be addressed include any pre-authorization strategies, obtaining multiple authorizations per tab (i.e. as the tab increases), and how "forced" approval codes can be entered and who has administrative privileges to force authorize a sale transaction. In each of these instances, starting in October, these practices can become very expensive.
The Misuse of Authorization System fee only refers to authorizations that do not have corresponding settled transactions. If your POS requests multiple authorizations during the process of running a tab but ultimately only uses one of those authorizations at settlement, then you will have stranded authorizations that will never be used. Visa implemented this penalty fee to reduce the occurrence of "ghost authorizations" (authorizations that are approved but never cleared), as these can adversely impact a cardholder's open-to-buy, leading to increased declines and confusion at the point of sale. Also, if your POS freely allows your staff to key-enter forced approval codes, then you risk not only the Zero Floor Limit penalty, but more importantly, exposure to chargeback risk.
Another development that requires F&B policy review is due to the increasing use of gift and other prepaid cards. Accepting Visa/MasterCard branded gift cards impact F&B tabs and tip policies, requiring unique processing procedures and staff training.
Because gift cards are not registered to a card holder and are treated as cash if lost or stolen, the finite balance presents challenges for otherwise routine functions like adjusting for tip. For example, F&B is unique in that the industry is allowed to submit transactions for settlement where the authorization amount is different than the final settlement amount (i.e. the added tip). For example, the card holder presents their payment card for the bill of $50. The server runs a $50 charge on the POS and (if approved by the issuing bank) returns the sales draft with tip line to the card holder. If the card holder leaves a tip greater than 20% ($10), any amount over $60 the restaurant is potentially liable for in a chargeback dispute. By card-company rules, restaurants are protected up to 20% of the original authorization for the tip amount (risk over 20% lies with the F&B establishment). Another potential issue is that the card holder knows that they have $50 on their gift card but they issuing bank returns a decline (issuer is automatically authorizing the charge in anticipation of the tip amount). To solve these issues, the card companies have implemented features for partial authorization. Your POS may return a message that the card has only been authorized for $50, alerting you to collect any remaining balance with another form of payment.
In general the POS/terminal should NOT be authorizing any card for more than the base amount. For a restaurant merchant there is an automatic 20% tip protection built in. Since tips over 20% can be an issue, you may decide not to take gift cards or not allow tips on gift cards or request the tip amount be known in advance so you don't need to 'adjust' for a tip or run a second gift card transaction for the tip amount.
Many establishments have learned the hard way that an approval code alone does not guarantee payment. To protect yourself against disputes/chargebacks, here's what you need:
Common Tab & Tip Issues
We often hear from restaurants, bars and nightclubs experiencing losses from open/close tab transactions. In most cases these are due to chargebacks from fraud schemes, missing signatures, or lack of a valid approval code on the charge. Excessive tips often lead to problems.
The most common scenarios include:
Here are a few best practices tips. Use any or all of these suggestions as your situation may require.