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Using prepaid cards can drive up processing costs when customers need more than one card to complete a transaction.

People who buy merchandise that costs more than a prepaid card's value often make up the difference with other cards; these "split-tender" transactions generate multiple fees, according to Mallory Duncan, a senior vice president and the general counsel at the National Retail Federation.

Cashiers often ask customers how much money remains on a prepaid card, but if the shopper guesses too high, the cashier might try to charge too much on the card, and the transaction will be denied. In such cases, the cashier will run the card again, for decreasing increments, until the system approves the transaction.

"It can be difficult, and the retailer may be charged an inquiry fee each time they ding the card up against the system," Mr. Duncan said. "Check $25. It's rejected, pay for the rejection. Check $20, pay again." If a $15 transaction is approved, "but the customer had $18 left," that customer "walks out with $3 on his card when he wanted to spend all $18."

Retailers' high turnover rates complicate the scenario, because merchants must train people on how to conduct split-tender transactions, he said.

The interchange fees on these transactions serve as a disincentive for accepting split-tender sales, Mr. Duncan said, because paying multiple fees makes the purchase very expensive.

"The profit margin in the retail industry is extremely narrow. The average after-tax profit of the average retailer is about 2%, and for some it's less," he said. "In the grocery store arena, it's about 1%, so if you start adding on fees, you're actually losing money."

Retailers want customers to use prepaid forms of payment in their stores, "but some of these forms are not quite ready for prime time," Mr. Duncan said.

Keith Sorrels, a senior vice president with Stored Value Solutions, a Louisville division of Ceridian Corp., said some merchants do not accept credit cards for paying the balance of a purchase made partially with a gift card. "The MasterCard/Visa/Amex world doesn't gracefully handle multiple tenders at the register - they either approve or decline."

In fact, a notice in the gift card section of American Express Co.'s Web site says, "Some retailers, particularly department stores, will only allow a 'split tender' transaction if the second form of payment is cash or check."

Paul Tomasofsky, the chief operating officer of the Network Branded Prepaid Card Association, said retailers and processing software vendors share some of the blame. Card companies require processors to include a prepaid card's balance when they respond to a point of sale authorization request, he said, but merchants must upgrade their systems to read the balance.

Every point of sale software maker has made the technology for reading this data available, Mr. Tomasofsky said. If a merchant must pay high fees for split-tender sales, "there's a simple solution: Upgrade your system."

Some large retailers say they have no problems with split-tender transactions.

"There is a cost to check the card for its balance, but we consider it a non-issue," says Beth Charlton, a spokeswoman for Macy's Inc. "The pinging for 'accept/decline' is normal for all of our sales events. We consider it good customer service to do the validating, which will hopefully return the customer to our stores."

Courtney Foster, a Target Corp. spokeswoman, would not discuss how its cashiers handle split-tender transactions, except to say, "Target does accept multiple-payment tenders for one transaction to help make point of sale an easy and seamless experience."

Mr. Tomasofsky said the market will dictate retailers' responses.

As prepaid cards become more common, "retailers will make the adjustments they need," he said. "They don't want to have customers feel their system isn't up to snuff, and it reflects on their service. Ultimately, it's the responsibility of the retailer to offer customers the best checkout experience."

Card companies require processors to encode the balance for general-purpose prepaid cards into the electronic messages generated when a cashier swipes the cards. But retailers are not required to have systems to read that data.

Very few merchants "have the ability to do partial authorization over an open-loop card," said Chris Truelson, a senior vice president of TSYS Prepaid Inc., a division of Total System Services Inc.

Merchants generally have little trouble checking balances on closed-loop cards, because the information is usually stored within the merchant's own system. With open-loop cards, "you're kind of at the mercy of the network you ride," Mr. Truelson said. "A lot of merchants haven't become equipped to take that balance information."

And even if they have become equipped, "it's really crucial how the message is returned," he said. "It depends on who's doing the back-end processing." Sometimes "switching stations don't have the capacity to pass the information along the food chain," and "there's a lot of ways the data can get dropped on the floor."

Merchants need to teach cashiers to read the electronic messages that can arrive during a split-tender transaction, Mr. Truelson said, and consumers should learn to keep track of the value remaining on their cards.

"I don't think we've run all the kinks out of the system," he said. "We've gone a great distance in filling this technology shortfall. Now we just have to go that last mile to get it working very well."

Mr. Tomasofsky compared the status of split-tender acceptance to the early days of the card industry. "If you roll the clock back to 40 years ago, when credit cards were starting, there were similar acceptance issues."

The card industry eventually worked out these issues, and the prepaid industry will do the same, he said. "Retailers who have not upgraded will do so as they see more and more prepaid cards. We really need to work together so consumers can have the best experience."

 

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