Small business relied on authorization number

An established merchant specializing in product sales through telemarketing decided to begin accepting credit card payments. His bank set up a merchant credit card account during a brief exchange over the phone and he was faxed documents to sign.

In part of the bank's material sent to the merchant, it said that obtaining an authorization number for each transaction would protect the merchant against fraud. In another place, it said that the merchant must obtain an imprint of the card and the cardholder's signature to ensure the transaction would be fully guaranteed. To be sure, the merchant checked with his bank branch and was told that everything would be fine as long as he obtained an authorization number for each sale.

Although the sales were made over the phone, the merchant required local purchasers to come in person if they wanted to pay by credit card. The bank had confirmed that this was the best way to protect against fraud.

When the merchant checked with the bank on how to handle out-of-town purchasers, the bank suggested that the purchaser give his card to the courier with a letter authorizing the courier to sign the credit card slip on behalf of the purchaser. The merchant followed this procedure and also obtained authorization numbers for all of the transactions.

A few months later, the credit card companies charged back some of the “face to face" credit card sales and all of the out-of-town credit card sales because they were fraudulent. The merchant had been a victim of a network of fraudsters that had stolen or copied several valid credit cards.

The merchant claimed that he should not be responsible for the fraudulent transactions because he had followed proper procedures and always obtained an authorization number for the transactions.

We concluded that the merchant had not been properly informed on several occasions.

The brochure which stated that an authorization number would protect the merchant from fraud was incorrect. An authorization number only guarantees that there is sufficient credit on the card presented to complete the transaction. The merchant would have benefited from a meeting with a bank representative who could have explained the “do's and don'ts" of accepting credit cards.

(2004)