By Allen Kopelman
Nationwide Payment Systems Inc.
Massive tipping is on trend, especially during the holidays when people remember front-line workers and service professionals. Every year, around this time, customers leave big tips to express their gratitude to delivery drivers, stylists, restaurant workers and sales associates. In many cases the tips are higher than the entire bill. While servers appreciate the goodwill from these generous tips, business owners run the risk of getting a chargeback when the total bill exceeds an original authorization.
Chargebacks can be frustrating for merchants, especially card-present business owners who are doing face-to-face sales. High tips can be problematic for retailers, restaurants, bars, nightclubs, salons and other venues where customers tip wait staff.
The 20 percent variance rule, established by Visa and Mastercard, has existed for as long as I can remember, going back to when I joined the merchant services trade in 1998 and began offering payment processing services through my own ISO in 2001. Through the years, I've seen this issue come up repeatedly, and I've helped all types of merchants avoid high-tip chargebacks.
Proven workarounds will keep your merchants, waitstaff and customers happy. One such workaround is to tip at the time of sale. When business owners enable tipping at the time of the sale, they bypass the old-school pre-authorization method that only allows up to a 20 percent gratuity. This saves time for the server and customer and protects the merchant from chargebacks.
Here's how it works: The terminal prompts for a tip and the entire amount is authorized. This eliminates any risk of a chargeback, even if the tip is enormous.
Consider the old-school way, which was to present the check, which has been pre-authorized by the terminal, and have the customer write in the tip. Then take it back to the POS. If the customer has written in a $30 tip, that transaction could be charged back by the card issuer or cardholder. With tipping at the time of sale, if the bill is $100 and the customer tips another $100, the card is authorized for $200—without invoking the 20 percent overage rule and eliminating that extra trip to the POS. A win-win.
Merchants can avoid an over-tip chargeback by having a server present a bill and let the customer write in the tip, then walk back to the POS (assuming the merchant doesn't have pay-at-table technology) and enter the entire amount of the sale, including the tip, to avoid the 20 percent tolerance rule by having the entire amount authorized.
Cashier checkouts are another great workaround. Customers go to a cashier, and the terminal adds the tip at the time of the sale. This is a great option for restaurants that may not have pay-at-table devices.
Another technology solution would require issuers to use SMS messaging to send a text message or SMS to cardholders asking if they meant to tip more than 20 percent and then approving the amount.
The 20 percent tip variance has caused headaches up and down the commerce value chain. And with the old-school way, it's not just tip money that's lost. Let's do the math:
Business owners need to adapt to many things; this is one of them. It's time to change how you handle this as a business owner or payments industry professional. 
Allen Kopelman, a serial entrepreneur, is co-founder and CEO of Nationwide Payment Systems Inc. and host of B2B Vault: The Payment Technology podcast. Email him at allen@npsbank.com, and connect on LinkedIn https://www.linkedin.com/in/allenkopelman/ and Twitter @AllenKopelman.
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