January 19, 2021 by: Alex Moisley
What Are Forced Deposits?
Forced Deposits (also known as Forced Capture) is the idea that if a recurring or multi-pay payment declines, you can try a Pre-Authorization (commonly referred to as PreAuth) for a lower amount. If the PreAuth approves, you can reuse the PreAuth code multiple times to capture the full amount you were hoping to recover. These transactions complete at a surprisingly high rate and can appear to be an enticing option for a merchant.
Here is an example of a Forced Deposit
A $100 rebill gets declined, so the following two steps take place:
- A lower amount of $20 is used as a PreAuth and is approved.
- The same Pre-Authorization code and amount are captured five times to reach the total rebill amount of $100.
The Problem with Forced Deposits
So, what’s the problem?
Forced deposits are an incredibly aggressive way to bill. It goes against best practices for Visa, Mastercard, and MID providers. Plus, it can significantly increase the merchant’s chargeback liabilities since every transaction can result in a chargeback. Beyond this, other articles like this one have referenced additional fees for specific reason codes. And some banks issue chargebacks more liberally when multiple transactions use the same authorization code. Forced deposits may seem like a good solution to recover declined transactions, but it’s not. This is a dangerous practice – especially for high-risk merchants that have every reason to fear additional risk and MID closure.
The Consequences of Forced Capture
Here are the consequences based on our $100 rebill example:
- The customer will now have five $20 transactions on their statement for their $100 bill.
- A chargeback initiated by the customer is more likely to succeed due to the PreAuth authorization code being reused.
- The merchant will have to pay five chargebacks (CB) fees instead of one and their CB count will increase by five.
- There are additional fine risks from Visa/Mastercard for unauthorized reuse of a PreAuth.
- There is an additional risk of MID closure by the MID provider for violating Visa/Mastercard rules.
Why Don’t Card Issuers Stop This Practice?
You may be wondering, why don’t card-issuers and associations reject these transactions and stop the practice of forced captures?
One answer might be that there is not a compelling enough reason to do so. For instance, MasterCard will issue a chargeback against merchants for all forced settlements that fail due to invalid card numbers, insufficient credit, and other factors. And these chargeback fines generate revenue, which the card issuers want. Successful forced deposits also increase the cardholder’s account balance providing issuers with an opportunity to earn more interest. In extreme cases of abuse, these merchants will be warned and can eventually be terminated. It’s within the card association’s rights to terminate these merchants because they are breaking the regulations. In general, however, associations tend to rely on high chargeback rates to discipline and expel merchants.
Depending on the merchant’s average order value (AOV), the revenue increase from forced captures can offset the chargebacks’ cost. And until recently, Visa had no fine system. So when a merchant’s AOV did not offset MasterCard’s fines, the forced deposit activity was limited to Visa transactions. Pretty crafty, right? Well, this party’s now over. Unlike the MasterCard scheme, where fines only rejected sales transactions, Visa’s $0.10 fee will apply to every forced deposit. Still, it is hard to see this small fee offsetting the revenue upside of forced deposits. So, it is likely that these rogue merchants will continue the practice while Visa takes a piece of the action.
Best Practices for Payment Recovery
You must trust the solution you are using for payment recovery as there are companies that already practice forced capture. Our recommendation is to ask the company if this is part of their offering as you need to know its impact on your business. Forced deposits are not a practice that needs to be implemented for a successful decline recovery strategy. Solutions that use AI and machine learning models have processed massive amounts of data that enable the transaction to be recovered based on an optimal retry strategy resulting in significantly higher approval rates.