Breaking the Rules

  Every day, merchants across the United States accept millions of credit card transactions. Also each day, thousands of merchants break basic rules for how to handle those payments.
  Though Discover Financial Services, issuer of the Discover card, and American Express Co. act as their own acquirers, working directly with their merchants, Visa USA and MasterCard International hold acquiring banks liable for merchant compliance with their rules. In turn, most acquirers hold the independent sales organizations that often sell their services responsible if their merchant customers fall out of line.
  Indeed, for acquirers, ISOs and agents that sell card acceptance services, the monitoring, educating and sometimes penalizing of merchants is a daily challenge of doing business.
  Complicating the matter is the fact that merchants, and their customers, often do not know or care about card-acceptance rules. The patrons at Venice Cafe, a popular Chicago Italian restaurant, for example, do not seem bothered by the signs hanging near the entrance and carryout counter that read: "$10 minimum for credit card use (Visa, MC, AmEx)." When patrons try to pay for $4 pizza-slice and beverage orders with a credit card, the server apologizes and cites the $10 rule. Typically, the customer ponies up cash instead.
  Both Visa and MasterCard prohibit merchants from setting sale-amount minimums for acceptance of their cards. AmEx discourages the practice but has no rule against it. Discover also does not ban the practice.
  George, one of Venice Cafe's co-owners, who declined to give his last name, says a $10 minimum is reasonable given the cost of credit card transactions.
  "Anything over $10 is fine," George says. "But I don't want to deal with the nickel-and-dime stuff."
  Jeff Lenard, spokesperson for the National Association of Convenience Stores, says "nickel-and-dime" purchases will start to become more of an issue for convenience stores as more consumers expect to be able to pay for the smallest purchases with plastic. "The interchange is a real big hit on convenience stores today," he says. "This is at a time when margins are as low as they've been in decades."
  Still, Lenard says, rule breaking by merchants is more a matter of ignorance than willful defiance. The association tries to keep its members informed, but the process does not reach everyone.
  "More than 50% of the stores out there are one-store operations," Lenard says. "It's an enormous challenge to communicate with them about anything."
  Vin Perrelli Jr., chief U.S. operations executive of Atlanta-based acquirer and processor Global Payments Inc., says that the minimum-payment requirement is one of the most commonly violated of Visa's and MasterCard's credit card-acceptance rules.
  Another common violation Perrelli sees is merchants giving themselves cash advances by charging credit card transactions on their own cards, then taking that amount of cash from their own tills. That violates Visa, MasterCard, Discover and AmEx rules.
  "It's pretty easy to spot because it's $2,000 or $5,000," Perrelli says. "You call them and they say, 'What's the difference? I'll pay it off in a month when my statement comes through.' They don't see a problem with it."
  Agents for Vantage Card Services Inc., a Woodstock, Ga.-based ISO, explain to their merchant customers that one problem with the cash-advance violation is that the charge will bounce back to them because it is not allowed. "We get calls from the bank saying, 'You need to call this person. We're going to reverse the charge," says Ty Hardison, Vantage vice president of business development.
  Hardison says that most merchants new to card acceptance break the rules out of ignorance, and Vantage's first response is to educate rather than penalize them. But longtime card accepters also can be confused by new rules and new segments when they move to online payments or when the industry adopts new security standards.
  Based on common merchant questions and violations observed by agents, Vantage posts several card-acceptance rules and explanations on its Web site, including highlights of rules that often are violated or are about to change. It also provides links to more comprehensive rules summaries published by Visa and MasterCard.
  Suspicious Activity
  Some violations seem more suspicious than others. One practice is dumping, in which a merchant about to go out of business re-presents transactions that were processed a couple of months earlier. There also are clerks issuing refund credits to friends or relatives for unsold merchandise.
  Perrelli says that acquirers do not always assume that storeowners or supervisors purposely allowed such violations. Global's agents usually try to work with merchants to solve the problems before penalizing them, but acquirers regularly discontinue accounts of merchants who rack up too many violations or one that is too serious to let slide.
  "We have to close merchants' accounts. It's at least a weekly event," he says. "The sad part is it's not always the merchant; it's someone working for them."
  While smaller merchants are more likely to go out of business and represent more risk for acquirers, larger chains tend to experience more mistakes and fraudulent violations by clerks, Perrelli says. "You'll find more games being played in the credits in the larger merchants because it's harder to catch," he says.
  Educating cashiers is an ongoing task made more challenging by the low pay and high turnover of employees in many stores, particularly large chains, Perrelli says. Such merchants need to build sophisticated training and reminders into their hiring and transaction systems to keep clerks in compliance.
  Harried supervisors need to remember their transaction-related tasks, too, such as making sure all terminals are balanced and batched transactions are sent to processors every night to avoid facing higher processing charges.
  Some violations are a matter of semantics, and savvy retailers know how to get around them. A merchant cannot post a sign that says credit card payments cost extra, which violates Visa, MasterCard, Discover and AmEx rules but he or she can reword it to say there's a discount for paying cash, sources say. (Cash discounts still violate Discover rules unless Discover and a merchant make an alternate agreement in writing.)
  Product Changes
  A common problem for acquirers is online merchants who begin business by selling shoes or widgets from Web sites then add porn or questionable vitamin supplements that they did not list when they applied for card-acceptance services. Perrelli says Global keeps a close eye on its online merchants. "We spot check their Web sites to make sure they're following the rules," he says.
  Global does try to keep its merchants up to speed on the latest card acceptance rules and best practices. "We try to educate the merchants right out of the chute when we approve them," Perrelli says. "We give them a comprehensive guide. It really covers soup to nuts." Global follows that up with articles on its Web site and in a newsletter it sends to merchants.
  Another big challenge is keeping tabs on ISOs to make sure that they and the agents who represent them are properly registered, comply with the rules and are able to monitor and educate the merchants they acquire for Global's services. "It's one of the toughest things," Perrelli says.
  Working with ISOs is the most important component of an acquirer's efforts to educate merchants because ISOs and their agents often have the most direct and regular contact with merchants. They serve as the face of the card industry to large chains and mom-and-pop stores alike.
  Training Needs
  Global runs regular training sessions for its ISOs called ISO Academy, and it provides educational materials that ISOs can pass on to agents or merchants and post on their own Web sites.
  Hardison says Vantage has only about 20 agents selling on its behalf now and is careful to make sure any new hires are high-quality and well-trained. "We'd rather grow at a safe pace than take just anyone," he says.
  "A lot of these organizations don't spend the time training their reps, so the rep can't pass that information on to their clients because they don't know it themselves," Hardison says. "We have pretty extensive classroom training for our reps. They come in for training, or we go out and do training on site."
  None of the major bankcard brands and several issuing and acquiring banks contacted for this story would reveal what violations merchants commit most often.
  AmEx works acceptance-rules education into its welcome kit for new merchants. That training is backed up by client managers who work with individual merchants and conduct merchant training sessions. "Our general approach is certainly consultative and educational," says an AmEx spokesperson.
  For Visa and MasterCard, the main focus is training acquirers to train ISOs or merchants. They both post summaries of their card-acceptance and chargeback rules on their Web sites and offer educational assistance to acquirers, such as Visa's newsletter called Visa Directions that includes articles about acceptance rules.
  Visa and MasterCard are starting to make more direct educational contacts with merchants. Last spring, MasterCard launched its "Who's Minding the Store" campaign, which includes pamphlets and other literature to explain security rules and best practices directly to U.S. merchants. And Visa, in conjunction with the U.S. Chamber of Commerce, recently conducted a two-month U.S. tour to present card acceptance and security best practices to merchants in nine cities.
  "It's important that every person who touches the payment transaction chain be working together," says a MasterCard spokesperson. "It's important to make sure that the cardholder has a good experience."
  Cardholders, though, may not care whether clerks check their signatures unless thieves have tried to use their card numbers. During a recent $145.71 transaction initiated with a Visa card at a Chicago Staples store, the payment terminal checked a shopper's signature against previous signatures on file, then flashed the message "Please hand card to cashier." The shopper did not, and the cashier sent the shopper on her way without ever having touched the card.
  While cardholders may be oblivious to most card-acceptance rules, some violations by merchants can make a difference in whether consumers view the card-payments system as safe and convenient or full of fraud risks, incorrect charges and other hassles. Making sure merchants follow the rules will remain a constant challenge for those on the front lines of the payments industry.
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