Wednesday, November 20, 2019

Authorize and Settle: Credit Card Processing

When your credit card is charged, your account might not be charged right away.

A reader writes that I should set up my credit card accounts to notify me when a charge is made.  I already do this - with all my accounts - both by e-mail and by text.  It is a bit of a pain in the ass to get so many e-mails (for some reason, Bank of America reminds me of my checking account balance twice a day) but I think it is better to be over-informed than under-informed.

In a recent article online, a celebrity is said to have had his "identity stolen" when in fact it was merely his credit card.  One of his employees snatched his credit card information and then charged several thousand dollars on it. What was sad was that the celebrity in question didn't notice the charges until the end of the month, and then went back through previous months' statements and noticed other fraudulent charges. And you wonder why these celebrities go bankrupt once their TeeVee series are cancelled - they are not paying attention to money.

Getting charge notifications is handy for other reasons.  For example, I am at a craft fair, and some vendor is trying to run a charge on his machine.   "I don't know if the charge went through!" he says, as his card swipe machine is on WiFi.  But the buzzing of my cell phone in my pocket says otherwise.  I look at it, and it says the charge was made.   It is handy to have this information in real-time.

But I don't think such notifications are a substitute for logging all your purchases, going online and checking your balance daily, and paying off your credit card daily.  Getting notices is fine and all, but if you don't sit down and think about what is going on, you may be overcharged.

Consider this recent event at the Greek restaurant in Jacksonville.   I charge $30 on the card and sure enough, my cell phone buzzes with a notification when the waitress scans the card. This scan, however, does not actually charge the card - it only places a hold on the card, a process known as authorization.

Authorization is used in restaurant transactions where the customer might add a tip later. By authorizing, the restaurateur knows the card is valid and the customer has sufficient funds or credit to  pay the bill.  Once the customer signs his copy - and hopefully leaves a tip - the restaurateur can then settle the transaction, which starts the process of charging the customer's credit card and eventually transferring money into the restaurateur's bank account.

By the way, these terms have specific definitions in the credit card industry, one thing I learned when I had a Merchant Account.   Having a Merchant Account allows you to charge people's credit cards, and back in the day, they were not easy to get.   You had to show all sorts of identification and banking data to show you were worthy enough to be entrusted with people's credit card information.   But since then, all that has changed.

Like I said, you can start one of these tech-that-are-not-tech companies simply by taking something illegal and making an app for it.  PayPal, one of the early online payment systems, violated the Merchant Account agreement by basically renting out their merchant account to millions of subscribers.  In the Merchant Account agreement, one of the key terms is that you can't run charges for your friend's or neighbor's businesses and then pay them back. You can't let others use your Merchant Account instead of applying for an account of their own.  If you did so, your Merchant Account privileges would be cancelled.

So along comes PayPal and violates this ToS, and the credit card companies go ballistic.  Not only are they letting one or two people piggy-back off their Merchant Account, they are letting millions.   Early on in the days of PayPal, the big card companies actually threatened to cut off PayPal, but they capitulated, as PayPal got too big, too quickly, and Visa and Mastercard realized that PayPal was generating millions upon millions in service fees for them.   Today, there are a number of such services, including Square.   Go big or go home.

And yes, PayPal did a number of sketchy things early on (such as claiming to be FDIC insured) and got away with it because they got big.   Kind of sad, ain't it?  You and I try to start a small business and we'd be hammered if we tried such things.  Such is the nature of silicon valley - you create an illegal business model and dare them to stop you.   But I digress.

By the way, I ended up closing my merchant account, as it was costing me $50 a month or more, and I was rarely using it, other than for government contracts.  I ended up accepting credit cards through PayPal, which would log the purchases as "contributions" for some reason - perhaps a way of getting around the ToS of their merchant account.   It was cheaper than their "Virtual Terminal" option, which was $30 a month.  It's so much easier just to be retired.

There are other scenarios where companies authorize first and settle second.  Hotels and car rental companies are examples, where they don't know what the final bill will be until you check out.   But they want to know you are good for the bill, and in the case of the rental car company, want a deposit on the car as well.  Such authorizations or "holds" as some call them, can decrease your available credit, or if placed on a debit card, tie up the money in your bank account.

I recounted before how a nice lady at the local Chinese restaurant ran my debit card five times for $25 of Chinese food.  "It not go through!" she says. What was happening was she was placing five authorizations for $25 apiece on my bank account.  Like many other restaurateurs, she did "batch" settlements at the end of the week, which is when the five authorizations were removed from my debit card and one settlement for $25 went through.  In the meantime, checks were bouncing as my balance was pretty precarious back then.   I learned a valuable lesson - never let your balance get that low, or if it is, you shouldn't be buying Chinese take-out.

In the Greek restaurant scenario, the charge of $30 showed up right away as an authorization (or "pending" as Bank of America calls it) and it wasn't until several days later that it shows as an actual charge of $42.   And yes, I got a notification by phone of the initial $30 charge and a notification by phone of the $42 settlement - but days apart.   Not only that, but with Bank of America, it seems their notifications are sent out nearly a day after the charge has settled.

If you are not paying attention and logging all those charges you might not notice the discrepancy.  After all, who remembers what they had for lunch several days ago, and moreover, what they paid for it?  I only remember it because I put that six dollar tip in the folder in cash.  Thus, it pays to log your transactions, daily, as you can remember what you charged and moreover, might still have the receipt in your back pocket.  If you wait days, weeks, or months, well, forgetaboutit.  There is a reason why you can't contest charges after a certain time period - the same reason we have a statute of limitations.

There are other weird things that happen with authorization and settlement. Sometimes an authorization will "stick" on your account even after the charge has settled.   For example, I bought a string of LED lights for the camper on eBay.  An authorization for $44 appears on my account and a few days later, is settled.  For some reason, the authorization remains, though.  Am I being charged twice?  I keep an eye on it for nearly a week, until the authorization evaporates.  It is possible the merchant forgot to remove the authorization until running a batch settlement at the end of the week.

In other cases, the authorizations evaporate a day before settlement. So a charge I entered in Quickbooks no longer appears on the BoA site, but the next day shows up as a settled transaction.  For one mysterious day, the charge evaporates into the ether.  A trivial thing, perhaps, but what you notice when you pay attention to these things.

So, yes, our reader is right, you need to set notifications to "on" on all of your accounts, as I have been doing for some time now.  But no, this is not a substitute for logging purchases, as it is all-too-easy to forget, days later, what you charged and why, and a bank message saying you spend $56.98 at Foodbie's All-You-Can-Eat Buffet might sound reasonable, days after the event, when in fact, it is a scam charge.

Plus - and this it the real deal here - it forces you to confront your spending habits, log your spending by category (and not the generic categories used by the bank's pie charts) and realize you are spending real money, not merely plastic.

It has made the biggest difference in my financial life and what has allowed me to get my financial house in order.