We've been getting a lot of questions about Visa's new Account Verification service. Hopefully this will help clear things up a little.
For years, card not present merchants (ecommerce, phone, fax, mail) have needed to verify a cardholder's information upon acceptance when there was a delay between collecting the credit card data and actually charging the card. For example, a merchant may collect the credit card information during the initial sign up process but offer a 30 day trial period before charging the card. In this situation, it's in the best interest of the merchant to verify the cardholder's information including the credit card number, expiration date, address and CVV value for accuracy and legitimacy. The only way of doing this today is by doing a $1.00 authorization (Visa refers to these as Ghost Authorizations). While the authorization does eventually expire, some banks will show the pending $1.00 authorization which leads to merchants inevitably getting support questions regarding an improper charge.
Visa's new Account Verification program is an alternative to the $1.00 authorization. With this program, a merchant will be able to do a Zero Dollar Value authorization request which can include Address Verification (AVS) and CVV verification. MasterCard has as similar verification process for card not present recurring billing merchants with a $1.00 'test transaction'. Visa is charging for this service but MasterCard is not.
Interestingly, according to Visa, the problem that merchants have was not the primary driver behind creating the Account Verification program. Visa is trying to eliminate $1.00 authorization request because it has a negative impact on cardholder spending. For those us who live in the space and deal with the shortcomings and problems caused by the $1.00 auth, we're pleased with the creation of the Account Verification product whether we (merchants and service providers) were considered or not.
Related posts:
Visa Misuse of Authorization
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Increasing fees for existing users of a product or service is never an easy thing. While there is rarely a perfect time to raise prices, there certainly are some times that are better than others. In the midst of some of the most intense dialogs that have taken place over credit card interchange, the fees that merchants pay the issuing banks to accept credit cards, Visa and MasterCard have announced one of the largest fee increases in years. The timing of their fee increase could possibly be written up in a case study as an example of what not to do.
Starting on July 1, 2009, Visa is introducing a U.S. Acquirer Processing Fee (APF). The fee will be $0.0195 on all Visa branded authorizations acquired in the U.S. regardless of where the issuer/cardholder is located. On April 18, 2009, MasterCard implemented a new Network Access and Brand Usage (NABU). Fee of $0.0185 for all U.S. based sales and credit/refund transactions.
For merchants that have a larger average ticket of $150, the Visa fee increase is pretty insignificant and amounts to 1 basis point (100 basis points = 1%). For a lower average ticket of $15, it amounts to a more significant 13 basis point increase.
The timing of the fee increase, while bad, may have been strategic in the wake of all the congressional activity surrounding the credit card reform that passed last month. I'm speculating, but I wonder if both Visa and MasterCard, facing some legislative risk, were trying to re-anchor the pricing discussion at a higher starting point in case congressional mood were to turn in favor of the groups lobbying for action. Alternatively, the fee increase could have had nothing to do with this 'chatter' and was fueled by that fact that both are now a public companies and need to take care of their shareholders and stock prices.
I spoke to a Visa representative recently at an industry conference and asked about the fee. I was told that they were increasing the price to more fairly align value created and price. Even if that is the case, and it's quantitatively supported, they need to do a better job selling these measurements with everyone actively engaged in the interchange pricing debate.
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Starting October 1, 2009, Visa will start assessing a 'misuse' fee for authorizations that are not either settled or reversed within certain timeframes. Visa refers to these as 'ghost authorizations'.
In the past, merchants frequently performed a $1.00 authorization only (without settlement) for verification and to retreive address verification (AVS) and CVV match or mismatch information. Visa explains that they're trying to reduce ghost authorizations because they restrict a cardholders ability to buy and increases declines.
Here is what merchants will need to do in order to comply with the new processing guideline and avoid the misuse fee. Card present authorizations must be reversed within 24 hours that have been submitted in error and/or cardholder cancelled. For card not present transactions, full or partial authorization reversals must be processed within 72 hours. Settlement must occur within 10 days of authorization for all merchants except Travel and Entertainment segments, which must clear within 20 days of authorization regardless of transaction date.
Visa has stated that they will be monitoring ghost authorizations and reversal levels to prevent abuse of the system and even levying fines in excessive cases. They've not revealed any thresholds or fine potential details.
As an alternative method to verify cardholder data, Visa has introduced Account Verification which will allow for a Zero Dollar Value authorization request and can include AVS and CVV data. MasterCard has as similar verification process for card not present recurring billing merchants with a $1.00 'test transaction'. Visa is charging for this service but MasterCard is not.
Yet obstacles remain with the implementation of these new changes. Many of the larger processors do not support authorization reversals and some don't have an ETA yet on supporting Visa or MasterCard's Account Verification services. Many of the the Visa and MasterCard issuers (financial institutions that issue the debit/credit cards) are not able to support these services today. Visa has mandated compliance from all their issuers and MasterCard is expected to follow.
Related blog posts:
Account Verification with a Zero Dollar authorization request
