The Debit Dilemma

Exploring debit card usage in the hospitality environment
by Jim Olizarowicz

It's no secret to hotel operators that managing credit card payments is a challenge. Perhaps that explains why few payment technology vendors choose to handle hotel transactions, and why even fewer do it properly. As if credit cards were not enough for hoteliers to deal with, debit card issuance and usage is on the rise, putting a new wrinkle in the electronic payment process. What does the proliferation of these cards mean to hotel operators? Quite a bit if they're not informed.

Lets first take a look at what differentiates the two primary types of debit transactions- on-line and off-line. On-line debit cards are like ATM transactions. After swiping their card, authentication is provided by a PIN code rather than a signature. Upon approval, funds are immediately transferred out of the guest's account into a temporary escrow account, then on to the merchant's account after processing the settlement batch. Should the merchant fail to process their settlement batch within 24-48 hours, they will likely lose the funds. This is a very important distinction, which will be explained a little further on in the article.

Off-line debit cards, sometimes called check cards, bear the Visa or Mastercard logo. Since these cards are virtually identical to standard credit cards, they are often handled in the same manner. During a typical transaction the guest swipes their card and upon approval, signs a draft. However, funds are not deducted from the guest's checking account until the merchant settles the transaction as part of a deposit batch. Should the merchant fail to process their settlement batch within 24-48 hours of the sale (check-out) they will be assessed a penalty resulting in a higher discount rate on their deposit.

While off-line debit allows for pre-authorization, care must be taken not to indiscriminately over-estimate the stay amount. This practice typically goes unnoticed when guests use their credit cards, however, hoteliers are more likely to hear complaints when guests use their debit card. Other problems arise when guests deciding to check-out with a different card, cash or split-pay. As with credit card transactions, an authorization request puts a hold on available funds (open to buy), for a pre-determined period of time, usually between 10-15 days. So in effect, even though the hotel bill was paid in full, the cardholder's cash funds are not available until the authorization expires.

Try explaining this to a vacationing family who cannot afford to see Mickey Mouse because "the mean hotel took Daddy's money!" The same would happen to a guest who makes and subsequently cancels a hotel reservation, having made a deposit with their off-line debit card. It's one thing to put a hold on a person's credit line, it's all together different to tie-up cash funds in a guest's checking account. The hotel merchant doesn't make these rules, but he is left to deal with upset guests.

Many hotels charge a deposit equal to a night's stay immediately upon receiving a reservation. If reservation clerks do not inform guests of this policy, they may be surprised to find their checking account has been debited before they even arrive on property.

While the popularity of off-line debit cards is gaining with consumers, not all merchants are so enthusiastic. Major retailers allege the cost of accepting off-line debit cards impacts profit margins compared to the lower-cost-per-transaction of personal checks or regional/local debit cards. When accepting credit cards the merchant pays a percentage of the ticket plus any base points, this is called a discount rate. When a debit card is accepted the merchant pays a flat rate, however rates can vary widely depending on the debit network used. Therefore, on high dollar purchases the flat rate would be more attractive to merchants and on lower dollar purchases the discount rate would be preferred.

Merchants have banded together to file a class action suit seeking to lower the merchant fees for off-line cards or the right to refuse to honor VISA and MasterCard off-line debit cards. The suit also addresses the issue of who assumes the risk of fraudulent transactions, the merchant or the cardholder. Current regulations place this risk on the merchant.

Merchants have other beefs with VISA and MasterCard over their off-line debit cards. Hotel and car rental companies believe there is a greater risk of loss with customers guaranteeing payment with off-line debit cards. Most banks will issue VISA Check Cards or MasterMoney cards to any customer with a checking account in good standing. There is no credit qualification required. Hotels and car rental companies rely on credit cards as a way to screen out high-risk customers.

As for on-line/pin pad debit, it is simply unsuitable for the hotel environment. The immediate transfer of money that takes place with an on-line debit transaction is the culprit here. Hotel transactions require an incremental authorization process whereby an initial check-in authorization is made based upon the length of stay, with incremental authorizations made to the card as additional charges are incurred (i.e. room service, in-room movies, mini-bar, etc.). Due to the need for a PIN code, additional authorization cannot be obtained without the guest's involvement. For the same reason, post after-departure charges for items such as honor-bar or last minute room charges cannot be collected. Conversely, credits cannot be issued for erroneous charges. Used solely for final check-out payment, on-line debit works fine. However, the extra equipment, integration, training and banking headaches involved with implementing on-line/pin pad debit makes it an undesirable option for hotel operators.

To date, the card associations have been successful in their attempts to force credit card accepting merchants to honor their off-line debit cards. In the meantime, hoteliers would do well to advise guests that deposits will be immediately charged to their card's and that the card they use to make a reservation and/or check-in should be the card they intend to check-out with.