Prepaid Cards: A Split Tender Headache?

  Try buying $30 worth of CDs, paying in part with a $25 open-loop card carrying such network brands as Visa, MasterCard, American Express or Discover. Oftentimes the merchant will say no, either because the retailer's payment system does not support so-called "split-tender" transactions with network-branded cards, or because the clerk simply does not know what to do. Either way, the consumer leaves frustrated.
  "It can really result in an unhappy shopping experience for the consumer who may feel left in the dark over why they are being declined or told they can't make a split-tender transaction," says Brian Ridder, senior vice president of First National Merchant Solutions, an Omaha, Neb.-based merchant processor.
  Backers of network-branded prepaid cards are well aware of the problem and are working on a variety of potential fixes. But no one is predicting a quick fix because there are so many potential reasons for the problem at a given retailer.
  Consumers seem to love to give and get gift cards. And they have few problems using a closed-loop card issued by a particular merchant, such as Best Buy or Borders, even if the card only covers a part of the purchase amount. Given the boom in gift cards in recent years, major merchants and their card processors have made sure they can handle split-tender transactions involving their own gift cards. For Best Buy, for instance, providing a balance on a Best Buy card only involves sharing information between the retailer and the card's processor.
  But present a Visa card at a Best Buy checkout counter, and the transaction has to go through the retailer's acquirer, through the Visa network to the issuer and back again. For the clerk at the checkout counter to be able to see how much money is left on that Visa gift card, all the participants in that chain must be prepared to handle that balance information.
  Often it is the merchant that has not upgraded its payment terminals and software to display that balance information, and that causes problems handling split-tender payments. In part, that is because retailers still are not seeing that many gift cards that carry the major payment brands.
  According to Mercator Advisory Group, branded prepaid gift card sales amounted to $1.4 billion in 2004, while closed-loop gift card sales were $47.1 billion that year. That means just 3% of the gift card transactions merchants handled that year involved network-branded cards.
  Until merchants see a lot more of the network-branded gift cards, they may not want to spend the money, which can run into hundreds of dollars per payment terminal, to make sure their point-of-sale systems can handle split tenders, says T. Jack Williams, senior vice president of strategic programs for Tier Technologies Inc., a payments processor based in Reston, Va. "Upgrading a system can be costly, and since branded prepaid cards are not mature and heavily used by consumers, I'm sure some merchants are questioning if it's worth the investment," Williams says.
  Merchant that upgrade their systems also must ensure that their clerks are trained on how to handle branded gift cards and on how to perform split-tender transactions, says Lori Breitzke, vice president of prepaid products for payment processor RBS Lynk.
  "This is a major problem," Breitzke said at SourceMedia's 18th annual Card Forum and Expo in May. "There are clerks that do not know what to do if the card does not cover the entire balance."
  Some merchants have made a decision not to allow split-tender purchases. Because such transactions involving branded gift cards require clerks to conduct two separate transactions, some merchants worry that this opens the door to fraud and error, Williams says. "There are merchants that have policies against conducting split-tender transactions, and that is another challenge for the industry," he says.
  In many cases, the cardholder must inform the sales clerk before initiating the transaction that they would like to use two forms of payment. They must tell the merchant how much they want to charge to the prepaid card, to ensure that they do not exceed the card's balance, and how they intend to pay the remainder.
  "This can be demanding and frustrating for the consumer, especially if they are not tracking their spending and do not know their balance," says Gray Taylor, vice president of research for the National Association of Conven-ience Stores.
  SOLUTIONS COMING?
  Taylor says his trade group has not heard many gripes from convenience-store owners about split-tender issues. But he believes that will change if the branded gift card market takes off.
  "We know it's a problem, and I expect that, as more of these cards begin making their way into consumers' hands, we are going to really hear more about this," Taylor says.
  The major payment networks all are taking steps to address this issue. Visa, MasterCard, Discover, and AmEx have enabled their systems to provide merchants with partial amount approvals, which prevent merchants from having to decline sales. These approvals allow clerks to inform cardholders of the balances on their cards.
  In 2003, Visa mandated that issuers of their cards had to be able to provide merchants with real-time balances. "We realized the challenge years ago and are working aggressively to solve them," says Steve Diamond, Visa vice president of prepaid products.
  MasterCard also is working to resolve the problem. "The system will do all the work, and the process will be simplified. That is why we are urging merchants to upgrade their systems," says Scott Galit, MasterCard senior vice president for global prepaid product development.
  Tier's Williams says he believes it will take about three years before open-loop split-tender transactions mirror the simplicity of processing merchants' closed-loop gift cards. Most other experts are hesitant to hazard a guess, although they emphasize the industry is focusing on the problem.
  "There is still a lot of work to be done, and it is going to take time to resolve the end-to-end process for split-tender transactions. But everyone is working to get there," Galit says.
  Whether the industry ultimately does solve the problem may depend on whether enough consumers buy network-branded gift cards. Only then will more merchants be convinced it is worth the expense to make it easy to pay with those cards at the checkout counter.
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