09/03/2013

Incremental Authorizations: Not for Restaurants and Bars

Payment processors and the card brands all too often fail to consider the food and beverage (F&B) industry when writing their rule books. The result is that F&B merchants occasionally find themselves equipped with tools that seem to fit their business, only to find out that using them would cost them in the long run.
Case in point: the incremental authorization. What is an incremental authorization? It is used to charge an additional amount to a customer’s card that their initial authorization would not have covered. The easiest example would be in a hotel environment. Imagine you checked in for one night and the clerk authorized your card for that night, but you later extended your stay for three more nights. That initial authorization was only for one night, so charging you for four at checkout could cause problems for the hotel. Instead, they put in an incremental auth request, essentially telling the credit card that you’ve spent more than they originally planned and verifying that you have enough credit to cover the proposed new charges.

So how does this apply in restaurants? Well, frankly, it shouldn’t – at least as far as Visa is concerned. Incremental auths are not intended to be used by restaurateurs. Still, restaurant managers, bartenders, or waitresses will occasionally try to use incremental authorizations when adding to a bar tab or when trying to process tips that are greater than the 20% buffer allowed by most restaurant merchant accounts. (A good problem to have, right?)

Both of these use cases violate Visa’s regulations and can result in additional fees and fines being charged to merchants. And, even if you do perform an incremental authorization, not only can you incur additional fees, you may not have any chargeback defense.

Since Visa does not allow incremental authorizations for F&B, they have not been able to provide a great solution to handling the bar tab or large tip situation in a way that protects you as the merchant. To ensure you always qualify for the best interchange rate, you should only authorize once for all food and drink consumed, followed by a settlement for the final amount that includes the tip. Any tip amounts greater than 20% of the authorized amount are subject to chargeback even if an incremental authorization is obtained. (This is the part where not being able to perform incremental authorizations works against you.) For bar tabs this means that you would need a way to run a tab without authorizing each item(s) added to the tab. Some merchants do this by holding the customers credit card or drivers license behind the counter. Other alternatives for handling should be discussed with your merchant services provider (MSP), but each has its own potential risks.

The F&B biz comes with its own unique set of challenges. Whenever possible, we work with you to address them and to find solutions that meet the needs of your business. To help you (and your staff) remember not to misuse incremental authorizations, Shift4 is able to configure some back-end options based on your merchant type and the specific setup of your merchant account. Please contact support@shift4.com, or call us at 702.597.2480 (option 2), to discuss the available options.