Automatic Unauthorized Tips

[tamiam]

An article in my local paper claims Bank of America-Visa has a program that will automatically add 20% to your restaurant bill, whether or not you chose to include a tip on your credit card receipt. Maybe you left cash, maybe someone else picked up the tip, maybe you decided not to leave one because it is fast food restaurant with no service, or maybe the service sucked. Whatver the reason, isn't this supposed to be the customer's decision--certainly not B of A's, and certainly not the restaurant's?

According to the article, some restaurants don't even know that their credit card machine has this feature, and they don't know how to turn it off. It is supposedly a temporary hold, and is supposed to be removed, or corrected, after a couple of days.

It is beyond my comprehension that Bof A and Visa, who are supposed to protect the customer, could possibly justify a practice of padding bills, especially in a way that doesn't show up on a receipt. Temporary or not, it is just wrong. Plus, if you've ever tried to clear up a billing error, perhaps you too have learned not to trust the system to get it right.

Has anyone else heard of this? Is there any reason to argue that it isn't just completely and totally wrong, wrong, wrong?

(edited to add that this seems to be a Bank of America policy that impacts Visa cards, perhaps not a policy by Visa, who simply fails to stop it from happening)

Article right here

Edited August 24, 2005 by tamiam (log)

[jvictor930]

According to the article, some restaurants don't even know that their credit card machine has this feature, and they don't know how to turn it off.  It is supposedly a temporary hold, and is supposed to be removed, or corrected, after a couple of days. 

Has anyone else heard of this?  Is there any reason to argue that it isn't just completely and totally wrong, wrong, wrong?

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This is actually a very typical practice in the hospitality and other industries. What happens is that when this setting is activated, the establishment will authorize an amount on top of the actual bill to ensure there is enough credit on the card to cover any extra charges. In a restaurant, the only extra charge would be a tip. However, whenever you check into a hotel, most places add anywhere between $25.00 and $50.00 per night to ensure there is enough credit for in room movies, phone calls and the like. In a rental car agency, they take an extra $100-200.00 for extra days or damage charges. The practice is actually called estimated authorization. Restaurants could likely not have knowledge they are doing this, as it is a system setting that is not easily found by anyone but the accountant.

Authorizations usually close out when the bill is closed out, however, there are situations where this is not released and your money can stay held up to two weeks. Most times, this results from putting the bill on your credit/debit card and leaving the tip in cash. When this is done, if the server doesn't close out the bill with the cc machine, the estimated authorization is transmitted to the processor and not the actual amount.

Heck, gas stations even do it...most times you'll see a charge for $1.00 and then the amount of the gas...that $1.00 is the estimated authorization.

Moreover, all of this is perfectly legal, covered by most cardmember agreements and is actually encouraged by the folks at Visa and Mastercard. And just so you know, Visa and Mastercard view any bounced check fees as your responsibility, not the establishment and certainly not thiers. The best defense is to either pay cash or to avoid using debit cards when gratuity is involved.

[estufarian]

OK! Calm down a little – there is an issue here but the way the article is presented highlights a symptom, not the issue.

As background, I have designed the ‘decision-making’ portion of credit card systems (i.e what limit people get, whether purchases are authorized etc – not the payment and processing of the charges). The policies that issuers (e.g. banks) decide on then overlay the decisions to be made ‘automatically’. There has always been an issue with restaurants. The credit card is ‘run’ for the amount of the check, and then the cardholder typically adds a gratuity. So, for example, the check is for $200 and the total could be $240. The authorization would be for $200 but the actual charge (which will appear on the credit card bill) will be $240 – this applies for the majority of credit cards used in restaurants (and some other industries e.g. car rentals, hotels where the authorized amount differs from the final amount).

The cardholder billing system ONLY BILLS THE $240 ACTUALLY SPENT. This balances to the amount deposited by the merchant (restaurant or whatever). The $240 has to be entered by the merchant (usually by terminal – most terminals have multi-functions these days). This system has all sorts of financial controls, as real money is involved.

When a card is swiped (or equivalent) at the point-of-sale (e.g. in a restaurant) an entirely different system is activated. This is the authorization system, which, in simple terms, goes off to see if you have a valid card with sufficient available credit to pay for the attempted purchase. It relies on the merchant to input the amount (of course it has no way of knowing what the real amount is – the merchant enters the amount to be authorized). All being well, the system responds with an OK (I won’t get sidetracked here with an alternative response). That system then logs the pending transaction, which can be used in many ways. But it doesn’t pass it to the billing system. So you can’t get billed for this part. From the cardholder perspective, the main effect is that this pending transaction is deducted from your available credit (the system expects the transaction to be completed eventually so it assumes you will spend that amount). So for example, if your credit limit was $5000, your balance $4000 (i.e. available credit $1000) then after authorization, your available credit will be notated down to $800 because of the $200 transaction, but your balance will not change. If you indeed spend the $240, when this is processed by the billing system your balance will now be $4240 and your expected available credit will have dropped by $240 to $760.

So far, so good (hopefully). BUT (and this is the core issue) there’s still the matter of the $200 authorization – how does the bank know that this is the base value for the $240 actually spent? And the answer is “It doesn’t know”. (If you think it should, consider what might happen if you returned to the restaurant/store the following day and spent $170, say, with a tip added to total $200). The actual process for matching authorizations and charges is parameter driven, which means each bank can enter its own rules (an example might be: If authorization and charge come from the same merchant and differ by less than 5% (or $5) then assume they are a matched pair). Once matched, the authorization (which recall has been notated against your available credit) will be filed away and the notation no longer applies. If they do not match, then both survive (one on each system) and the system thinks that, instead of $760 available credit, you only have $560 (the $200 notation still applies). This potentially will affect your ability to use the card, although after a few days (again set by the individual bank, but around 5 days in my experience) this notation will be automatically dropped. As long as you don’t go over your limit (including notations) during this period, you won’t be affected. But if you do, then all sorts of complications to you could ensue, and potential embarrassment too.

This MAY be avoided if the authorization is processed for an estimated amount. If the restaurant processes the authorization for $240 this will match perfectly with the charge and your available credit will be correctly computed. If your issuer (bank) uses a 5% tolerance, then any gratuity between 15% and 25% will similarly be matched, so the restaurant will have enabled anybody who tips in that range to avoid some potential embarrassment. However, the person who tips in cash will now be caught by the notation (the system is still waiting for a $240 charge, but only finds a $200 charge).

There’s no absolute right or wrong here, merely advantages/disadvantages to the participants. Incidentally, the system I designed included a capability to input ‘negative authorizations’ (e.g. a restaurant could input $200 then a negative $200 then a genuine $240). But I don’t know if any users actually activate that capability. The bank I was working with certainly hadn’t in the two following years.

If the check is $200 and you tip separately, then if the restaurant enters any other amount, it is fraud (OK let’s be generous a clerical error)!

[cupcakequeen]

that article really got me steamed up! it was the biggest story on the front page and made it seem like restaurants are "stealing" from customers. it was a very convoluted article and not many people read through it enough to realize that it is a temporary hold. and it was never explained properly that it is to include the tip amount in the original authorization.

PLUS, they present the story of a poor college student that got thai takeout & the $2 hold on his account put him in overdraft. why is someone with $7 to their name ordering takeout anyway?

and don't we have bigger stories to put on the front page of our newspapers?

Edited August 25, 2005 by cupcakequeen (log)

[tommy]

PLUS, the present the story of a poor college student that got thai takeout & the $2 hold on his account put him in overdraft.  why is someone with $7 to their name ordering takeout anyway?

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because they don't have time to shop and cook because they're cramming for a final? because they can? because the monthly check they get from their uncle/mom/dad/sister to help them eat and have somewhat of an interesting experience while at college comes in the mail the next day? because it's only 7 dollars?

i just don't see that question as relevant. and given the factual explanations offered by estufarian and jvictor it would seem that the entire thread and idea is irrelevant given the article in question. a terrible article in my estimation. and one that feeds peoples' needs to get up in arms about nothing.

Edited August 25, 2005 by tommy (log)

[cupcakequeen]

PLUS, the present the story of a poor college student that got thai takeout & the $2 hold on his account put him in overdraft.  why is someone with $7 to their name ordering takeout anyway?

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because they don't have time to shop and cook because they're cramming for a final? because they can? because the monthly check they get from their uncle/mom/dad/sister to help them eat and have somewhat of an interesting experience while at college comes in the mail the next day? because it's only 7 dollars?

i just don't see that question as relevant. and given the factual explanations offered by estufarian and jvictor it would seem that the entire thread and idea is irrelevant given the article in question. a terrible article in my estimation. and one that feeds peoples' needs to get up in arms about nothing.

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well, obviously he couldn't because it put his bank account into a negative balance.

i feel bad for the little thai restaurant that is mentioned over and over again as the restaurant that is overcharging their customers.

[tommy]

PLUS, the present the story of a poor college student that got thai takeout & the $2 hold on his account put him in overdraft.  why is someone with $7 to their name ordering takeout anyway?

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because they don't have time to shop and cook because they're cramming for a final? because they can? because the monthly check they get from their uncle/mom/dad/sister to help them eat and have somewhat of an interesting experience while at college comes in the mail the next day? because it's only 7 dollars?

i just don't see that question as relevant. and given the factual explanations offered by estufarian and jvictor it would seem that the entire thread and idea is irrelevant given the article in question. a terrible article in my estimation. and one that feeds peoples' needs to get up in arms about nothing.

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well, obviously he couldn't because it put his bank account into a negative balance.

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"couldn't," or "shouldn't." i'm confused by what you're suggesting. it seemed that in your first post you were passing judgment as to whether or not a person should order take-out if he/she has "7 dollars to their name."

i very often go into "negative balance" on my checking account. it doesn't stop me from using my ATM card, given i know how dynamic my account is. i'd sure hope strangers wouldn't pass judgment on that. maybe they would, though.

Edited August 25, 2005 by tommy (log)

[lia]

It's a ridiculous practice and as a restaurant manager I get calls from customers several times a week whose receipts don't match their statements. Plus it's mostly customers who used their debit cards, as people tend not to check their credit balances as often and as carefully.

Apparently we DO have the option to 'turn it off' but the powers that be choose not to because there's the possibility that a waiter might get screwed out of a tip. I would much rather run that risk than deal with as many questioning/suspicious customers.

To be fair, most customers understand when I explain the reason for the hold. But...some don't. or some won't. They think we're adding tips on for our jollies and I know they're complaining to others. Some get downright vicious and I really can't blame them if they're down to the last hundred in their checking account and some stupid restaurant is holding a good portion of that for several days because we're worried they won't have enough for tip. It just doesn't help anyone.

[LEdlund]

If everyone would tip 20% this problem wouldn't exist

[zilla369]

Someone I know works for BofA, and we had a HUGE argument about this just the other night. He had come home from work, full of frustration at having had to repeatedly explain this exact situation to people in his help desk capacity.

The point he kept trying to hammer home (to me during the discussion - not to callers) is that it's all in your member agreement when you sign up for a credit or debit card, and also expained in detail in the agreement you sign when you (as a vendor) contract with BofA to provide your credit card processing. So it's completely "legal and fair". Okay, conceded.

However, the point I kept trying to make is that (at least in the case of the debit card transaction) during that day or two or five, somebody somewhere (probably BofA, possibly Visa/Mastercard) is earning interest off that "blocked off" amount while it's parked temporarily in a general ledger account somewhere. Sure, the interest in the example transaction would be miniscule. Let's see... $40 at, let's be generous and say 1% interest for two days: I'm coming up with something like US $.00219etc., or just a little more than one-fifth of a penny. (Somebody please, check my math.)

BUT: Multiply one fifth of a penny times a paltry, oh... fifty million transactions a day. That's over $109,000 US in a single day! Not to mention all the overdraft charges and over-credit-limit charges the banks are raking in when people don't realize those funds are set (temporarily) aside.

Anyone remember "Office Space"? Damn, it must feel good to be a gangsta.

[winesonoma]

Someone I know works for BofA, and we had a HUGE argument about this just the other night.  He had come home from work, full of frustration at having had to repeatedly explain this exact situation to people in his help desk capacity.

The point he kept trying to hammer home (to me during the discussion - not to callers) is that it's all in your member agreement when you sign up for a credit or debit card, and also expained in detail in the agreement you sign when you (as a vendor) contract with BofA to provide your credit card processing.  So it's completely "legal and fair".  Okay, conceded.

However, the point I kept trying to make is that (at least in the case of the debit card transaction) during that day or two or five, somebody somewhere (probably BofA, possibly Visa/Mastercard) is earning interest off that "blocked off" amount while it's parked temporarily in a general ledger account somewhere.  Sure, the interest in the example transaction would be miniscule.  Let's see... $40 at, let's be generous and say 1% interest for two days:  I'm coming up with something like US $.00219etc., or just a little more than one-fifth of a penny. (Somebody please, check my math.)

BUT:  Multiply one fifth of a penny times a paltry, oh... fifty million transactions a day.  That's over $109,000 US in a single day!  Not to mention all the overdraft charges and over-credit-limit charges the banks are raking in when people don't realize those funds are set (temporarily) aside.

Anyone remember "Office Space"?  Damn, it must feel good to be a gangsta.

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This suprises you? It's how business is done. When I was a contractor I bought on the first week of the month because I used their money for 30 days. They all do it and it's part of the contract. Beware of fast food and mini marts because they will put a hold for 30 days. Edited August 26, 2005 by winesonoma (log)

[zilla369]

This suprises you?

No, it doesn't surprise me at all. Before I decided to become an underpaid, non-benefit-receiving kitchen slave, I myself worked at various banks for over 15 years; my last job title was "senior banking officer" (making more than twice my current annual salary).

What does surprise me is that more people (and specifically, someone who works in the industry and spends a great deal of his day defending the policy that generates the windfall in question) don't realize it's going on.

I'm still waiting for someone to bust me on my math, though. Lord knows the old brain ain't what it used to be, calculation-wise. Washing sheet pans and whisking sabayon all day has kind of repressed my inner banker. Anyone care to check my work?

Edited for grahammar.

I mean grammar.

[slkinsey]

Marsha, it's not the math so much as it is that I don't think that's quite how it works.

Please someone correct me if I'm wrong (estufarian would probably know), but according to my understanding this is what happens when you make a credit card transaction at a restaurant.

1. I get a bill for $100 at a restaurant and hand over my credit card. My credit card has $500 of free credit remaining.

2. The restaurant swipes the card, the terminal goes online and seeks authorization for $120 in anticipation of an approximately 20% tip.

3. Your bank then "reserves" $120 on your credit account. Your free credit is now $380.

4. You add whatever it is that you're going to tip (let's say it's $18) and sign the bill.

5. Eventually, the restaurant runs the transaction in the amount of $118. This is reconciled by the back end systems. $118 is charged on your credic account, the extra $2 of "credit hold" is released, and your free credit is now $382.

Let us say, for the sake of argument, that it takes two days for the reconciliation to happen and for your effective free credit to go up by two dollars. Who is earning money from this? The bank doesn't have an extra two dollars of your money. They can't start charging you interest on the restaurant charge until it reconciles and the $118 charge actually hits your account. All they are doing is saying that there is two dollars worth of credit that they won't let you use for two days. The interest on that two dollars is zero, because it's not money -- it's money that you haven't borrowed yet. In fact, by preventing you from borrowing those two dollars, the bank is depriving itself of the potential to make money from the interest on those two dollars.

Now, in terms of a debit card, it's not clear to me that the bank is taking that two dollars out of your account and then putting it back in when the reconciliation happens. Rather it may be that the bank is saying that you can't take that two dollars out until the reconciliation happens. Or rather, much like with the credit situation, they're saying that you can't take out twenty dollars until they find out just how much the bill actually is and do the reconciliation.

But here's the thing: tha Bank doesn't need to take the money out of your account and park it in a general ledger to make a profit from your deposits. They're already lending your money out to other people and charging them interest even while it's sitting in your account. That's how they make their real money.

[zilla369]

Maybe I wasn't clear...I didn't mean that the bank was charging the consumer interest. I meant that they were earning interest (most likely from the Federal Reserve Bank.) And again, I am unsure if this is the case in a credit card situation - but in a debit card situation they are - aren't they? - deducting the money from your bank account. That money's going somewhere, temporarily. It's real money. If it's not in your account, it's been moved somewhere. And I'm convinced that "somewhere" is an interest-bearing account. They're earning interest on your actual bank account balance every night.

*sigh*....maybe I'm totally off-base. Probably.

[slkinsey]

I've used debit cards for years, and don't think I've ever seen a charge on my statement for X dollars followed by a credit for y from the same transaction. My larger point, though, was that banks don't need to do tricky things to put your money in an "interest bearing account" and make money. First off, who would be paying the interest anyway? What happens is, for example, you and 10,000 other people have checking accounts in a bank to the tune of $5,000 dollars each. That's $50,000,000. Now they're not just going to sit on that money. They're going to take some of it and buy bonds, they're going to take some of it and make loans to homeowners and businesses, they're going to take some of it and use it to pay businesses when their cardholders make credit card purchases, etc. At any given time, the actual liquid funds available to the bank are likely to be substantially less than $50,000,000 because they're out there making money with most of it. But even though the bank is technically taking some of your money that you have on deposit and using it for something, they're not going to reduce the balance of your account. They don't have to. They can just use the money and tell you that you have $5,000 on deposit. If you wanted all of your money, they would have enough liquid funds to give you your five grand. If all 10,000 customers wanted their $5k, the bank would be screwed and FDIC would have to pay whatever the bank couldn't pay.

So the reason the bank doesn't have to do something sneaky to move your money into a different account for a few days in order to make money off it, is that they're already using as much of your money as they're allowed to use anyway.

[fiftydollars]

It should be clarified that neither the restaurants nor the servers actually receive any additional money as a result of this practice. They are generally paid on the basis of the receipt signed by the customer and not on the basis of whatever was “pre-authorized.”

The article doesn’t really do a good job of making this clear… Well actually they purposely try to make it seem like restaurants and waiters are conspiring with the bank to screw you over and this is definitely not the case here.

Just thought I would clarify.

[lia]

Now, in terms of a debit card, it's not clear to me that the bank is taking that two dollars out of your account and then putting it back in when the reconciliation happens. Rather it may be that the bank is saying that you can't take that two dollars out until the reconciliation happens. Or rather, much like with the credit situation, they're saying that you can't take out twenty dollars until they find out just how much the bill actually is and do the reconciliation.

The vast majority of my problems come from callers who left their tip in CASH, so the discrepancy is far more than the $2 in your example.

[JasonTrue]

An authorization for a charge doesn't actually transfer any money to the bank or to the merchant.

Only upon settlement a few days later does any money actually change hands.

If a bank is actually deducting the money off of a debit card, rather than just reducing the available balance, it seems like a procedural error. I've never seen any evidence that the money was subtracted from my account until the transaction was settled, on either my credit union or commercial bank accounts. The "Available Balance" usually changes, though.

An authorization isn't the same as a transaction...

I suppose it's possible for a restaurant or company to mistakenly set the transaction mode to "sale" rather than "authorization." But that makes adding/subtracting amounts for tips more complicated, at least in my credit card system. A specific complaint to that restaurant, a call to their bank and/or card processing or POS equipment vendor, should resolve such issues.

In my online store I never complete a transaction until after something has a shipping label and is out the door, but you can bet I authorize the transactions fairly quickly after receiving an order.

Maybe I wasn't clear...I didn't mean that the bank was charging the consumer interest.  I meant that they were earning interest (most likely from the Federal Reserve Bank.)  And again, I am unsure if this is the case in a credit card situation - but in a debit card situation they are - aren't they? - deducting the money from your bank account.  That money's going somewhere, temporarily.  It's real money.  If it's not in your account, it's been moved somewhere.  And I'm convinced that "somewhere" is an interest-bearing account.  They're earning interest on your actual bank account balance every night. 

*sigh*....maybe I'm totally off-base. Probably.

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[rooftop1000]

I was so angry last week when I checked my statement and saw a "pending" food reciept was higher than my charge slip said ....I didnt know weather to argue with the lady with limited english at the counter ....go to the bank ...or the cops...so I did nothingfor a few days...because I knew I didnt cross off the tip line...when the charge actually went through it was right amount......OY

tracey

[Pan]

If I pay the tip in cash, I ALWAYS cross out the tip line.

[Allura]

And this is why I don't use my debit card to reserve a hotel room anymore. For me, if I'm pulling the debit card out to pay a restaurant, I'm also putting the tip on it, and it's usually 20% (or close to it), so it's not a big deal. But when the hotel starts holding an extra $50-$100, it's a little more annoying.

Then again, I've been using a debit card (and online banking) practically since they were created.