Original Credit Transactions and Chargebacks
Cash was once king, but in an increasingly digital global marketplace, it’s hard to beat instantaneous electronic payments. Services like Cash App and Venmo have made it easier for individuals to send money back and forth, and the widespread adoption of these payment platforms—especially among younger consumers—has created opportunities for merchants as well.
Now, credit card companies are getting in on the action with new services based on Original Credit Transactions, a method of transferring funds that works faster than a normal credit transaction. What are Original Credit Transactions, and do they pose any new chargeback risks for merchants?
Consumer shopping habits are always evolving, and the past few years have only seen an acceleration in the already fast-moving shift toward e-commerce and electronic payments. Merchants were quick to adapt, but it took longer for peer-to-peer payment platforms to extend the convenience of fast electronic payments to small in-person vendors and other individuals engaged in informal transactions.
PayPal made it possible for eBay and Craigslist sellers to safely exchange funds, and with Venmo it’s become much less of a hassle to split a restaurant tab with your friends. These, however, are proprietary platforms that require prior opt-in from all parties involved.
Credit card networks have begun offering payment services that utilize Original Credit Transactions, the fund transfer method that makes some of these P2P apps possible. With these services—Visa Direct and Mastercard Send—all you need is a participating payment gateway to send funds directly to any valid credit card account, without the recipient having to wait a day or more for the money to be settled to their account.
Merchants can use OCTs as a fast and customer-friendly way of providing refunds, payouts, and other credits, but be aware: an improperly processed OCT can result in an unusual type of chargeback.
What are Original Credit Transactions?
Card networks like Visa and Mastercard recognize different types of transactions. An OCT is a special transaction that “pushes” funds directly into the account associated with a particular credit, debit, or prepaid card number—provided the card issuer has enabled it to receive fast fund transfers.
A normal credit transaction is processed, and settled, like a payment in reverse. It goes through the normal authorization and batching process, and the funds don’t hit the recipient’s account immediately. Sometimes, it takes several days for the funds to arrive.
With an OCT, the funds should show up much faster, although this can depend on the issuing bank.
In some markets, issuers are required to make the funds from an OCT available within thirty minutes. For many users, the net effect will be near-immediate fund transfers.
How are Original Credit Transactions Implemented?
The main OCT implementations are Visa Direct and Mastercard Send. For merchants to be able to submit OCT transactions, two things are required:
- An acquiring bank that offers Visa Direct and/or Mastercard Send
- A payment gateway that is able to handle OCTs
As long as these elements are in place, the merchant only needs to enter the cardholder’s payment credentials, and they can then send an OCT to immediately credit the account.
There are various reasons why merchants might want to make use of OCTs. They can be used to issue refunds, to pay out gaming winnings or reward point redemptions, for vendor payments, or for any other situation where a merchant needs to credit funds back to someone.
In the majority of cases, OCTs will put funds back into the user’s account much faster than a normal credit transaction, without requiring the customer to sign up for any P2P service. Faster funds, one would hope, would result in a better experience and a happier customer.
Can Original Credit Transactions be Subject to Chargebacks?
The unfortunate downside of OCTs is that they can result in chargebacks. The most likely reason for this to happen is when the cardholder’s card has not been set up by the issuer to receive fast fund transfers. Visa has a reason code set aside for this scenario—13.8, described as “Original Credit Transaction Not Accepted.”
Not every issuing bank accepts OCTs. In some countries, OCTs are not allowed at all. If an OCT is sent to a card issued by one of these banks, the bank itself may initiate a chargeback—which, in this case, results in funds being sent back to the merchant’s account. This is the total opposite of the typical chargeback that takes money away from the merchant, but it’s far from harmless. An OCT chargeback will still incur chargeback fees and cause your chargeback rate to go up.
The way to avoid these chargebacks is to make sure a card can accept OCTs before you process one.
Merchants can inquire with their acquirers and payment processors to see if they offer a way to make this determination through the payment interface, before processing. Merchants can do their own homework to find out if the regions they’re operating in prohibit OCTs, and to learn which major issuers won’t accept them.
If you have to enter the payment credentials for an OCT manually, be sure to double check the accuracy of your data entry. Because OCTs don’t go through the usual authorization step, it might be easier for a transaction to get processed to a mistyped account number.
With OCT services like Visa Direct and Mastercard Send, the card networks are presenting merchants with a flexible new option for providing refunds and other outbound payments. Merchants should take advantage of new tools like these when it serves the needs of their customer base and leads to more positive experiences.
The thing to remember about any new payment option is that it will always have some impact on your exposure to chargebacks. Inform yourself ahead of time about how disputes and chargebacks will be affected, and once the option has been implemented, analyze your chargeback data so you can determine whether or not it’s having a negative effect. When your payment situation changes, your chargeback defense strategy often needs to change alongside it.
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