By RIC BLUM
In the day-to-day operation of a pawnshop, it is very common for one to see money both coming in and going out.
We make a sale, and cash, checks or credit and debit card receipts go into the cash register.
We make a loan or purchase an item from a customer, and cash goes out of the cash register.
A customer makes a finance charge payment and again, cash magically appears in our cash drawer.
But every now and then, there is a small financial transaction that takes place called a sales reversal or, more commonly, the dreaded refund.
In the day-to-day operation of a pawnshop, it is very common for one to see money both coming in and going out. We make a sale, and cash, checks or credit and debit card receipts go into the cash register. We make a loan or purchase an item from a customer, and cash goes out of the cash register. A customer makes a finance charge payment and again, cash magically appears in our cash drawer. But every now and then, there is a small financial transaction that takes place called a sales reversal or, more commonly, the dreaded refund.
Before you get the wrong idea, this is not a refund article. You may even have a “No Refunds” policy. So be it. I’m not going to tell you how to run your business (although I think you are wrong).
However, when there is a need to make a refund, it is my opinion, and that of a majority of my colleagues, that the refund transaction should be a mirror image, a reversal, of the original transaction — with any possible exceptions documented in writing and posted.
Your state laws and your credit card rules all state that your refund policy needs to be posted in writing; “No Refunds,” “10% Restocking Charge,” “No Cash Refunds — Store Credit or Exchange Only,” etc. Whatever works for you. The law usually only requires your refund policy be posted.
Assuming you are going to make refunds, what’s next? If you follow the advice of returning funds in the same manner as they were accepted, this would lead to the following:
• If the customer pays by cash, he gets cash back.
• If he pays by check, he gets a check in return.
• If he pays by credit card, he gets a credit to his charge card.
• If he pays by debit card, he gets a credit to his debit card.
We were doing pretty well until that last one. It seems as though many merchants can’t credit a debit card transaction. It is a one-way street.
However, since debit cards are usually affiliated with a national credit card, it is possible to “credit” the debit card as if it were a credit card. After all, they share a common account number and your customer had the option of using his debit card in either the debit or credit mode when conducting the original transaction.
And while you may not be able to process a return or refund on the debit side of the card, you can process it on the credit side of the same card.
What’s the Difference?
When using the card in the debit mode, your customer is required to enter a PIN to authorize the transfer of funds from his checking account to yours. The money, if available, is then removed immediately from your customer’s account and, upon terminal settlement, the money is transferred to your account, less any merchant fees.
We all love to make sales with debit cards. It’s almost as good as cash.
Most debit cards may also be processed in a credit card mode. This is extremely beneficial in cases where your credit card processor can’t process your customer’s debit card as a debit card, or if your customer requests that you run the transaction as a credit card….
When using the card in the credit card mode, your customer is required to sign the receipt to agree to the transaction and authorize the issuing company to transfer funds to your account. The money, if the customer’s account is in good standing, is then withheld from your customers account and, upon terminal settlement, the money is transferred to your account, less any merchant fees.
An advantage of debit card over credit card transactions is your discount rate (the fees your bank and credit card processor charge you to handle the transaction) is typically less than if it were a credit card transaction.
However, recently I have become aware of a possible glitch in the system — refunds.
In the past, we would simply process a debit card return as if it were a credit card transaction refund or credit because we could not actually undo (reverse) a debit card (PIN-based transaction) through our credit card terminal. The only way we could process the debit card return was to treat it as if it were a credit card (signature-based transaction) return and have the customer sign the refund receipt.
In October 2010, I made a debit card sale for $202.
Two days later, the customer returned the item. Since I can’t refund/return/credit a debit card sale through my terminal, I processed the refund as if it were a credit card transaction. Everything went fine, including the printing of a transaction receipt.
Another two days go by and I receive a call from my credit card processor, asking about this “credit.” I get out the paperwork and explain the transaction.
“You can’t do that,” I was told.
“What do you mean? We’ve always done it this way.” (The instruction guide that came with my credit card terminal only shows how to make credit card sales, debit card sales and credit card refunds.)
“Not anymore. Refunds for debit card based transactions can only be made by cash or check.”
“Where does it say this?” I asked. Can you show me or send me a copy of this rule?”
“The rules have changed. You’ll have to read your merchant agreement. Contact your merchant services.”
So I posed the hypothetical question to the caller from my credit card processor:
“What do I do?”
“Give cash or check.”
“What if I don’t have $3,000 in cash in my store?”
“Write a check. The money from the sale was put directly in your bank account.”
And what is an out-of-town customer going to do with my check? Or an in-town customer, after banking hours or on weekends?
Your customer naturally expects the money to be put back into his account so that he may re-spend it. And if the card processors can take the money immediately, why can’t they put it back almost as fast?
I don’t like to be told what I can and can’t do. I do follow the rules, but I often insist upon knowing exactly what they are before I change my policies and procedures.
What rules? That was my question — where does it say this?
And if this is true, just whose rule is this? MasterCard’s? Visa’s? Or my bank card processor’s?
I decided to call my account representative directly and get to the bottom of this matter.
I received a call back from him the next day. He told me that he was familiar with a policy to that effect (debit card refunds by cash or check only) and he would follow up with more information in a week as he was going on vacation.
OK. I had talked to a person of authority and I would have my answer in a week.
After more than a week, I fired off an email to this person because I was sure that my request and concern was not as high of a priority to anyone else as it was to me.
I also called my bank card processor’s support line, explained the situation and asked their customer service representative the same questions. I received the same answer. You can’t credit a debit card purchase to the card on the credit side.
OK, but just show me where it says this?
“It’s in your merchant agreement.”
“Can you send me a copy?”
Finally, the customer service representative said to me, “Off the record, this may not be a MasterCard/Visa policy, but may be a ‘My Credit Card Processor’ policy and we are instructed to say…”
She also promised to send me a copy of my merchant agreement showing this rule. I never got it — because it doesn’t exist.
Let the Emails Begin
While waiting for my credit card processor account representative to get back to me, I fired off a few emails to MasterCard and Visa asking the same questions.
Visa responded as though I was a consumer looking for a refund or questioning a merchant’s refund policy.
This was not the case. I am a merchant, not a consumer, and I sent the email to an email address I found on the Visa Merchant Services Web page for information relating to an alleged Visa policy.
In the meantime, I shot off another email to my credit card processor to see if they had come up with any documentation for this new ruling that they seemed so concerned about.
Visa responds again. The response was not helpful or even relevant.
When all else fails, I just do things the old-fashion way. I picked up the telephone and called Visa Merchant Services.
After being transferred a few times, I finally reached a customer service representative who verbally told me that Visa has absolutely no policy prohibiting a refund, credit or reversal from a transaction originally made with a debit card from being processed through a credit card terminal or as a credit to the credit side of the customer’s account. If such a policy exists, it is on behalf of my credit card processor, not Visa.
Now my credit card processor is not a fly-by-night operation. It is listed near the top of the Fortune 500 companies and is also a top financial services company.
In the midst of my emails to MasterCard and Visa, I receive a response from my credit card processor. It was not the answer I was waiting for. Just more running around in circles.
So I was directed by my credit card processor to look, myself, for the answer to my questions. Which I did, to no avail.
Finally, the answer I was waiting for. It seems that I was correct all along, only My Credit Card Processor won’t come right out and say it.
From: Bob White@My Credit Card Processor.com
Sent: Thursday, November 4, 2010 5:30 PM
To: Ohio Loan
Subject: RE: Debit returns/ refunds
Sorry for the delay. I finally got the explanation that we were looking for. Please see below.
“There is currently no regulation against refunding a Pin Based debit back to the original card as a credit the same as if it were an actual credit card. The reason behind advising the merchant to give back Cash or Check as form of refund is due to the funding timelines back to the cardholder. This merchant can definitely follow their procedures for pin bases debit returns if it has been working for them. It is often advised against because it can take 10 business days to 2 billing cycles depending on the issuer for the card holder to get credit back for a return.”
To summarize, because it takes a long time for the money to refund to the cardholder, it is recommended to provide refunds in cash or check, but you can certainly continue to provide refunds via the terminal. Please reach out to me with any additional questions.
Title; Position – Business Banking
Card Processor Merchant Services
The following question was sent to MasterCard by email, on Oct. 23, 2010. After being forwarded on behalf of merchant_inquiries to the proper source, I received this response on Nov. 12, 2010.
From: Ohio Loan
Sent: 10/23/2010 02:55 PM
Subject: debit card returns or refunds
Can you tell me where it is written in your policy that a merchant can no longer give a refund through a terminal for a debit card purchase?
I was told by my processor that I can only refund debit card transactions by CASH or CHECK.
When I asked where it said this, they told me “in your merchant agreement.”
They also said that this is a new change.
My local bank could not seem to help me either.
This email was forwarded on to the next higher level on Nov. 4, 2010 and a response came on Nov. 12, 2010.
Subject: Fw: debit card returns or refunds
Can you please respond to this merchant? Thanks.
—– Forwarded by Ann Smith/NYC/MASTERCARD on 11/04/2010 04:20 PM —–
Thanks for your inquiry. I have reviewed both our rules and operating procedures and have found no changes in our policies related to providing cardholder refunds on a MasterCard card. Can you provide the name of your current MasterCard processor so that we may contact them and better understand the context of the comments surrounding refunds.
Senior Business Leader
MasterCard Worldwide | U.S. Markets
What Do Others Do?
I can’t be the only one in the world with this problem. There must be some other retail giants who are experiencing the same thing and have already done the research to find the best possible solution when dealing with debit cards. So, I checked out a few. I went to their websites and looked up their refund policies.
Best Buy. For debit card purchases under $250, it is treated as a CASH transaction. Debit cards simply aren’t set up to accept refunds in the same way credit cards are and oftentimes when returns are processed in that fashion, it takes much longer for the banks to process this and have the credit posted to the account.
• PIN-based debit purchases of $500 or more will be refunded by check. PIN-based debit purchases of less than $500 will be refunded in cash.
• Hybrid debit/credit cards (cards with a major credit card logo) used as a PIN-based debit of $250 or more will be refunded back to the card. Hybrid cards used as a PIN-based debit of less than $250 will be refunded in cash. Hybrid cards used as a non-PIN based transaction will be refunded back to the card.
Bed Bath & Beyond. Return policy
With receipt, store refunds in the original form of payment. Without receipt, if purchase was made by credit or debit card, or check or gift card, the store may have record and refund will be in the original form of payment. Otherwise, store may issue store credit or merchandise refund request.
Target. Store refunds will be issued in the same form of payment originally used for purchase:
• Credit Card Purchases: refund will be credited to the original credit card.
One More Time
On Dec. 30, 2010, I placed a call to my credit card processor’s help line, one more time and told them that I had made a sale with a debit card (PIN-based) and now have to make a refund. Then I asked, “How do I do this (refund/reversal) through my terminal?”
The answer was the same as before, “You can’t. You must make the refund with cash or check. There is no way to make a debit card refund through your terminal.”
Some things never change.
I also ran a few test charges with a debit card through my terminal the same day.
When I tried to VOID the transaction, I received the message, “Card Not Supported.”
Next, I tried to do a DEBIT REFUND, the message displayed was “Service Not Allowed.”
So lastly, I entered it as a CREDIT REFUND, swiped the card, entered the appropriate information and out comes a REFUND receipt.
In tracking the time for this refund to post, I found that it took four days before the money was put back into the cardholder’s account. Technically, this is four days from settlement, but my terminal settles every night automatically at 10p.m.
More interestingly, it seems to have taken two days for the debit card return to be deducted from my account. I processed both the original transaction and the return on Dec. 30, 2010. So, two days to get the money back out of my account and another two days before it was put back into the cardholder’s account.
The transaction records from the cardholder’s account looked like the following:
12/30/10 MERCHANT PAYMENT
$1.00 AT LOC XXXXX OHIO
LOAN CO INC DAYTON OH
01/03/11 DEBIT CARD RETURN
$1.00 AT OHIO LOAN CO INC,
DAYTON, OH ON 010111
What To Do Now
Keeping your customer satisfied is one of many goals for which a merchant must strive.
Protecting one’s assets is another.
Just because someone (even a representative from a company) tells you something, does not necessarily mean it is true, correct or in your best interest.
What the customer needs to keep in mind, is, the merchant is processing the return (credit/refund) through his card processing terminal while the customer is standing there. The money will be taken back out of the merchant’s bank account immediately (or at the end of the business day/settlement time). After that, the whole transaction process is in the hands of the financial institutions involved. The merchant no longer has the money. The customer has a receipt showing that the funds were “credited” to his debit card account.
Although three to five business days are the norm for a debit card transaction reversal, it is not uncommon for the process to take 14 to 30 days. Again, this is a financial institution issue, not a merchant issue.
Once the refund/return/reversal money comes out of my account, then it becomes a banking issue — the speed of the return of these funds to the customer’s account should be much faster.
The usual procedure for refunds is a transfer of money out of a merchant’s account to their card processor. The processor will then process the refund and place the money back into the account of the debit card holder.
Of course, according to MasterCard Rules, 29 October 2010, Updated 10 December 2011:
United States Region Rules
3.9 Transaction Requirements
3.9.3 Refund Transactions
A Debit MasterCard Card Issuer must post funds due to a Cardholder as a result of a refund Transaction to the Cardholder’s account within one business day of Transaction settlement. The Issuer may place a temporary hold on such funds to the extent allowed under applicable law if the Issuer determines that the circumstances or account history warrant the delay.
This is also why many people or groups advocate using your debit card as a credit card for all transactions. You are afforded more protections and a refund/reversal may be less troubling.
On the other hand, using a debit card in the credit card mode defeats the original purpose of the debit card. The cash still comes out of the customer’s account immediately, but you, the vendor, now pay a much higher rate for processing the card as a credit card versus a debit card.
And yes, you are also paying a higher rate for accepting business cards and reward cards. You don’t think the bank is paying your customers those reward and mileage points each month do you?
My current merchant fees range from .95% x sales + $.20 x items to 1.05% x sales + $.15 x items (plus other incidental fees) for debit card transactions.
For credit card transactions, my current merchant fees range from 1.54% x sales + $.10 x items to 2.95% x sales + $.10 x items (plus other incidental fees), depending upon the type of credit card presented.
Slower refunds or credits are just a fact that consumers are going to have to face if they chose to use their debit card, in debit mode, for all transactions.
Cash or Check Back? I Think NOT!
There is sound logic for only giving a refund back in the same form (or as close as possible) in which the original transaction was made and not giving cash or check back.
Furthermore, it is against both MasterCard and Visa regulations to give cash refunds for credit card transactions. According to the regulations all merchants agree to in order to accept MasterCard or Visa, refunds can be placed back on the original card. This helps prevents fraud on the side of the cardholder.
MasterCard Chargeback Guide 16 April 2010
Merchant Acceptance Procedures and Special Transaction Types
2.1 Acceptance Procedures
2.1.8 Returned Merchandise, Adjustments, Credits, and Other Specific Terms of a Transaction
The following sections provide information on returned merchandise, adjustments, credits, and other specific terms of a transaction.
184.108.40.206 Returned Merchandise and Canceled Services
A card acceptor is not required to accept returned merchandise or the cancellation of services unless a right of return or cancellation was a conditionof the transaction. If the card acceptor agrees to accept merchandise for return or to cancel services, the card acceptor must credit the same account used to purchase the merchandise or service.
If the merchandise or service is purchased with a MasterCard card, upon a partial or entire return of merchandise or cancellation of service, or if the card acceptor agrees to a price adjustment, the card acceptor may not provide a full or partial refund or adjustment by cash or check or by any means other than by a credit to the card account used to purchase the merchandise or service. The cardholder must be provided a copy of the credit receipt.
A cash or check refund is permitted for involuntary refunds by airlines or other carriers or card acceptors only when required by law.
If the cardholder were to call their card issuing bank or affiliate and state they returned an item but did not get a refund, the bank would first check for a refund back on the original card. The records will clearly show that you, the merchant, have not credited your customer’s card account. There is no record of your cash or check payment in the bank’s computer.
Who do you think they are going to believe? After all, the card holder is their customer, not you. Can you say “chargeback”?
This also shows the need for documentation of all refunds or returns, the same as that of the original transaction.
Still, the final decision is up to you. If you are comfortable giving back cash or your company check, for a debit card refund, go for it.
As for me, if they pay by a card, they get a refund by the same card, although not necessarily in the same card mode. And it appears that this is the safe, proper and acceptable way to handle debit card refunds. It is also bank card and card processor approved, if you push hard enough. And yes, I have the documentation to prove it.
Ric Blum is a vice president of Ohio Loan Co. in Dayton, Ohio. He has served as president of the Ohio Pawnbrokers Association, secretary/treasurer of the National Pawnbrokers Association and as a member of the board of directors and the board of governors of the National Pawnbrokers Association. Please feel free to e-mail your comments to RicBlum@att.net or mail them to Ric Blum, Ohio Loan Co. 3028 Salem Ave. Dayton, OH 45406.