y now, tip overage preauthorizations should be a thing of the past. In 2004, Visa U.S.A. established a 0% tip-authorization policy for restaurants. Likewise, MasterCard International stipulates that restaurateurs must not add a tip without the cardholder's prior knowledge and agreement.

Yet the issue still arises, with misinformation abounding, particularly in the case of a newspaper blog where some discussion participants last August thought restaurants were actually billing extra for tips that were never left. Their ire illustrated the downside of the practice, particularly for debit card users who keep their account balances low. A one-week hold on funds never spent can be frustrating.

Visitors to GS Online's MLS Forum recently brought up the problem. "One of my merchants is getting hammered by his customers about this," wrote MLS Forum member kagtdthomas in early June. Member chett2787 responded, "[C]oincidentally, I not five minutes ago received a call from one of my pizzeria's ... threatening to leave if this is not taken care of Monday morning."

According to "Rules for Visa Merchants: Card Acceptance and Chargeback Management Guidelines," an authorization including an estimated tip is against Visa's policy. (Review the document online at www.usa.visa.com/download/business/accepting_visa/ops_risk_management/rules_for_visa_merchants.pdf

For example, a cardholder's bill is $50, and the staff adds on a 20% tip (for authorization purposes) but the cardholder leaves only a 15% tip (or a cash tip). Because of the authorization "hold" on the larger amount, the customer may think he was overcharged. Visa stipulates this practice may result in phone calls from unhappy customers and, ultimately, reduced business.

Legacy of bygone days

The problem can arise with legacy POS equipment and software from the days when a 20% preauthorization overage was the norm. The fix is to ask the equipment vendor to ensure the terminals are programmed to authorize only for the known check amount, Visa advises.

A software download or upgrade may rid the equipment of automatic bill padding. Yet, this isn't always easy. The terminal's "size and memory may not allow you to make changes remotely," said Gary Rutledge, Chief Operating Officer for North American Bancard.

Likewise, Hypercom Corp. advises restaurants or their merchant level salespeople to contact their processor or bank for the appropriate software to bring an older terminal up to code. "We used to put that function into the terminal software, but that was years ago," a Hypercom spokesman said.

Restaurants aren't the only merchants guilty of the practice. Tip overage preauthorizations are an even greater problem at hair and nail salons than at restaurants.

"You are going to find a lot of merchants out there who like [the overage] and are not willing to make the change," Rutledge said. "Outside of snatching their credit card machine, there's not a lot you can do. That's what the [card Association] fines are all about. They are for bringing organizations into compliance."

The risks of noncompliance

And fines to restaurants have reportedly been increasing. "Visa U.S.A. reports an increase in the number of compliance cases against restaurant merchants resulting in fines and penalties," states an undated Global Payments Inc. Web page. Visa did not respond to a request for confirmation of the information.

"Debit card users are more likely to frequently review their available funds ... online, at an ATM and at some POS locations," according to Global Payments.

"Restaurant merchants should request an authorization for the transaction amount presented to the cardholder. Restaurant customers may continue to enter a tip amount, and restaurants will continue to settle and be funded for the total amount of the purchase, including tip."

Global Payments restaurant products have built-in features to help avoid erroneous tip authorization, according to the company's Web site. A Global Payments spokesperson was not available for comment.

Visa rules state that a merchant is protected against an authorization denial after the customer adds a tip. "Restaurant authorizations are automatically valid for the transaction amount plus 20% to protect merchants from chargeback liability for an incorrect or disputed transaction amount."

Here's a tip ...

MasterCard specifies that when the cardholder adds a tip after preauthorization, the merchant needs to get a second authorization only if the tip exceeds 20% of the bill.

"To ask the merchant to get a second authorization for the gross amount including tip can create a secondary issue: What happens to the first authorization? If it doesn't go away, they have a problem, especially with their debit customers," Rutledge said. "This is especially true for signature debit, which means you have two authorizations: one for net and one for the gross."

If the restaurant tries to authorize only the difference between the two amounts, the merchant gets hit with two interchange fees.

"The resolution is to print a receipt for the total amount with a tip line; let the customer write a tip on the receipt; then authorize and settle," he said. "But a lot of restaurants don't have systems sophisticated enough to do that."