Get authorization for customer's card before delivering goods
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Dear Your Business Credit,
We take payments over the phone, so what happens when we get a declined credit card and cannot reach the customer? Is there a way to go after them like there is for writing bad checks? -- Katie
I can understand why you're frustrated about customers giving you declined credit cards. Unfortunately, going after these folks -- satisfying as it might be -- won't help you much.
Here's why. The major card issuers require authorizations on card-not-present transactions, including phone transactions. If you violate an issuer's rules, that may hurt you if there is a charge-back and leave you on the hook. Sixty percent of small businesses say they couldn't bounce back if they had to cover a fraudulent charge over $500 out of pocket, according to a survey by Cayan, a Boston-based provider of payment technologies.
When someone's card is declined, the best strategy is patience. Hold off on delivering your product or service until you can reach the customer and obtain another form of payment. Otherwise you could end up losing out.
All of the major card issuers say the onus is on merchants to obtain a card authorization before completing a sale.
- Visa's guidelines for merchants say "Authorization is required on all card-absent transactions ... Authorization should occur before any merchandise is shipped or service performed."
- MasterCard's Transaction Processing Rules say, "A merchant must obtain an online authorization from the issuer for... [a]ll e-commerce, mail order, phone order, recurring payment, and other card-not-present transactions, regardless of the transaction amount."
- American Express has a similar rule: "For every charge, the merchant is required to obtain an authorization approval."
That said, if you suspect fraud, you do have some recourse. Check your agreements with the card issuers to see their individual recommendations. I covered the procedures for handling a card you suspect is fraudulent in my previous column, "What merchants should do if customer presents unsigned card." Receiving a fraudulent card is a potentially volatile situation, so it's important to proceed carefully. Since you interact with customers by phone, you will have the advantage of physical distance from any fraudsters if you do have to report what seems like a nonlegitimate transaction. But if, say, you run a neighborhood pizzeria and the crook who tried to give you a stolen card lives around the corner, you may be vulnerable.
Generally, though, you will find that there are less-dramatic reasons people's cards get declined than fraud. Many people forget that a card in their wallet has expired or that they haven't activated a new card. If they intended to pay you for whatever they are ordering, they won't balk if you politely ask them for another form of payment. Given the constant stream of headlines about data breaches and identity theft, customers may even appreciate it that you are careful about processing transactions.
You do run the risk of occasionally disappointing customers by waiting to deliver your goods or services until you can complete a transaction the proper way. But you will be protecting your business from costly charge-backs -- something no business can afford.
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