Note: Descriptions are shown in the official language in which they were submitted.
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SYSTEMS FOR FACILITATING CARD PROCESSING SYSTEMS/IMPROVED RISK CONTROL
This invention is related to and is a continuation of and claims priority
based on US
SN 60/256,728 filed December 18, 2000.
Field of the Invention
The invention relates to financial transactions, and more particularly to
systems for
facilitating card-based financial transactions with improved risk control.
Background of the Invention
to In the sector of the financial transaction industry dealing with the
processing and
clearing of checks andlor bank drafts, a system for controlling risk for a
merchant by check
guarantee developed. The banking system, as a general rule, does not provide
recipients of
a draft on a demand deposit account with a ready ability to check whether
there are funds
sufficient in an account to cover the drag. Nor, as a general rule, do banks
provide
merchants with an ability to place a hold on funds upon the acceptance of a
draft. As
between the merchant and the bank, the risk of insufficient funds in the
account to cover
the check falls on the merchant. In the case of stolen checks and falsified
signatures, if the
bank catches the forgery within an established time, the merchant also bears
the risk of loss.
To increase the volume of financial transactions for merchants and control
risk,
2o check guarantee entities arose, entities independent of a depositor's bank
and, analogously
with the merchant, without general access to information at a depositor's bank
in regard to
the status of accounts or any ability to place a hold on funds. These
entities, based upon
their own data bases and statistical histories, guarantee checks for
merchants. The
guarantee service providers, for a predictable fee, estimate the chances of
sufficient funds
being in accounts at time of arrival of the physical check at the bank for
processing for
checks that are presented to their merchants for acceptance. They also
estimate the
genuineness of the check andlor the willingness of the drafter to cover the
check.
Typically, if a check is approved by the service and then it is rejected by a
bank, the
guarantee service pays the merchant for the check and pursues its own
collection processes,
3o to the extent possible.
The credit and debit card industries (together with smart cards and/or chip
cards
referred to generically herein as "charge cards") developed with different
risk control
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procedures and allocations. In the charge card industry, card issuing banks,
or their
surrogates, are consulted for approval by the merchant prior to the merchant's
acceptance
of a charge on a card. Issuing banks (or the like, understood to include novel
financial
units or bodies) can determine whether there are sufficient funds or credit in
a cardholder's
account (understood to include chips and/or a variety of traditional andlor
novel
"accounts") and place a hold on these funds. If sufficient funds or credit is
deemed
available by the issuing bank and the transaction is approved, a hold is
placed on those
funds or credit. When a card is presented and the issuing bank (or its
surrogate) is
contacted and approves the transaction, the bank then assumes the risk of
nonpayment.
to For the facilitating of financial transactions and acceptance of this risk,
the merchant is
charged a predetermined fee.
(If a cardholder subsequently disputes a charge, and usually only when a card
was
presented, the issuing bank or a member of the card transaction clearing
service will
investigate. The merchant generally will only bear a loss upon genuine
cardholder claims in
regard to an improper delivery of the goods or services. This is referred to
as a chargeback
and is not related to whether or not the cardholder pays or eventually pays
the issuing
bank.)
(The issuing bank or its surrogate agents may employ services to predict
whether a
presenter of a card is genuine cardholder, since the issuing bank in general
bears the loss for
approved transactions on lost or stolen or forged cards.)
In the charge card system when the physical card is not presented by the
purchaser
but rather card information is presented orally or electronically or the like,
the risk of loss
for nonpayment generally shifts. In the case of the physically non-presented
card, risk of
loss from nonpayment significantly shifts to the merchant. The merchant can be
"charged
back" for non payments in a significant number of circumstances.
Merchants, to help reduce their "chargebacks" in the charge card system,
especially
when a physical card is not presented, such as for transactions over the phone
or over the
Internet, have developed systems themselves or have employed outside services
to preview
transactions to detect for fraud or past non-payment. This preview is
sometimes referred to
3o as scrubbing or screening. Scrubbing or screening typically involves
checking a database of
known fraudulent cards or high risk scenarios. It could involve sophisticated
algorithms or
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other mathematical or statistical calculations. Transactions may be scored and
a merchant
can determine for itself which scores it will accept or decline.
To add a further complication for the merchant and a further incentive to
scrub,
Mastercard, Visa and the Like, associations of banks or other organizations
that issue cards,
set regulations in regard to card usage. Qne such regulation may limit a
percent of
"chargebacks" that a merchant can sustain and continue to be allowed to accept
the cards
of that association. A limit might be set at one percent or three percent of
all charged
amounts. Such limits reflect the fact that declined payments by a cardholder,
even though
the merchant may eventually bear the risk of loss, typically represent time
and effort that
must be spent by an issuing bank (or its surrogate or the association) to sort
out and
determine whether there are legitimate reasons for the decline, or whether
legitimate goods
and services were actually delivered to the cardholder, whether a chargeback
is justified and
where lies the proper liability therefore, and/or whether a cardholder should
be terminated.
In some industries, such as in sales of goods and services over the Internet,
i5 chargebacks have a tendency to rise well over the preferred limits of card
associations.
Such provides an incentive for merchants and/or their surrogates to attempt to
independently predict up front likely chargebacks and decline those
transactions in advance.
The instant invention discloses a further innovation in the charge card
industry, a
service that appears contradictory to standard operating procedures in the
industry, a
2o service,that appears upon the surface not to be necessary at all in the
charge card world.
Historically in the charge card world an issuing bank can determine up front
the sufficiency
of funds/credit in an account and place a hold on the funds or credit prior to
approving or
disapproving each transaction. Unexpectedly, the instant invention discloses a
guarantee
service for charge cards.
25 The guarantee service is particularly pertinent to the use of charge cards
in the
situation when a card is not physically presented. The instant invention
discloses a system,
a service and a provider that will, as in the check draft world, guarantee
approved
transactions. Transactions that the guarantor approves, typically for the
merchant, are
guaranteed against "chargebacks" to a merchant (or at least against certain
"chargebacks".)
3o Thus, the risk of chargebacks on guarantor approved card transactions can
be passed to the
guarantor, for a fee, preferably a quite predictable fee.
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Typically the guarantor guarantees against cardholder non-payment due to
fraudulent card (lost, stolen, counterfeit) and/or fraudulent claims of non-
delivery or
inadequate delivery of goods and services. Contracts between a service
provider and the
merchant would typically not guarantee payment of chargebacks for legitimate
complaints
in regard to the quality of goods and services delivered.
By servicing a plurality of merchants such a guarantor can be in position to
better
estimate andlor predict a risk of chargeback, can develop superior databases
and algorithms
and can spread the risk over a broader base of transactions. As an advantage
to a
merchant, the instant invention promises to permit a management of risk and a
greater
to percentage of transactions to be approved while lowering a merchant's total
chargeback
cost and the potential loss of ability to accept certain types of cards
because of excessive
chargebacks, thereby generating greater sales, predictable costs and lower
overall costs.
The fee paid for a guarantee to cover all chargebacks is preferably a
predictable amount,
removing the risk of wide variations in losses in the business.
The instant invention has further advantages. The guarantor service, most
likely in
return for a fee from a banking or card network, could optionally guarantee
chargebacks in
situations where a merchant is in collusion with a customer. In such cases the
bank or card
system ultimately bears the risk of loss, because no chargeback is possible in
regard to the
merchant. The guarantor provider of the instant invention could also
optionally, in return
2o for a fee, assume the job of determining proper outcomes in the cases of
the disputed
delivery or provision of goods and services, as between the merchant and a
customer.
Issuing banks and their surrogates may well find the guarantor more e~cient
and cost
effective in resolving such disputes.
The instant invention also has application in cases where a physical card is
presented. In the case of stolen cards, or in the case of disputed goods
and/or service
claims that are bogus, the guarantor for a fee may directly or indirectly
alleviate the risks of
a bank who would ultimately bear the loss in such situations.
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Summary of the Invention
The instant invention includes a method for facilitating charge card
transactions
comprising evaluating electronically transmitted data (including over the
Internet and the
like) relating to a charge card transaction and guaranteeing a charge card
transaction that
meets certain criteria. The guarantee is preferably against risk of loss to a
merchant. In
certain circumstances a guarantee could be against risk of loss to an issuing
bank or
members of a card processing system. The charge card is typically a credit
card or a debit
card, but could be a smart card or chip card also. The method is regarded as
particularly
valuable in transactions when a card is not physically presented. Preferably a
predictable
l0 fee will be charged, typically to a merchant. It is envisioned that the
guaranteeing can
include paying chargebacks on behalf of a merchant to a processing system.
Such paying
chargebacks might occur upon a pre-notification of a customer dispute.
Preferably the
guarantee service would receive an assignment of collection rights upon
payment of a
chargeback such as the merchant's ownership rights for collection purposes.
Typically
determining whether a charge card transaction meets certain criteria would
include
reviewing a negative database and/or reviewing a positive database and/or
application of
rules to transaction data and/or application of an estimation system including
algorithms
based upon historic transaction data.
Brief Description of the Drawings
A better understanding of the present invention can be obtained when the
following
detailed description of the preferred embodiment is considered in conjunction
with the
following drawings, in which:
Figure 1 illustrates typical transactions between a customer, merchant,
guarantee
service providers, processor, merchant bank, issuing bank and card
association, in
accordance with one preferred embodiment of the instant invention.
Figure 2 illustrates alternate modes for the execution of the guarantee of a
service
provider in a preferred embodiment of the instant invention.
Figure 3 illustrates a possible collection procedure of a preferred embodiment
of the
present invention.
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Detailed Description of Preferred Embodiments
Figure 1 illustrates transactions of preferred embodiments of the instant
invention.
Purported cardholder/customer C proposes a charge card transaction CP to
merchant M in
return for goods and services G/S. (Merchant M may be the "merchant of record"
for the
card processing system. Alternately, merchant M may contract with a service
provider S2
who stands in the place of the merchant as a merchant-of record for the card
processing
system.) In the system of Figure 1 both alternatives are illustrated.
Typically only one
alternative would exist for any one transaction or merchant. The service
provider, S 1 or S2
of Figure 1, can interface only with the merchant or can interface between the
merchant and
to at least a portion of the card processing system, generally illustrated in
Figure 1 as
comprising processor P, issuing bank IB and card associations. In the system
illustrated in
Figure l, S2 might even be regarded by processor P as the merchant-of record.
Alternate
system provider illustrated as S 1 in Figure 1 may be independent of and have
no direct
contact with the merchant card processing systems. System provider S 1 simply
provides
guarantee services to merchant M who would most likely be regarded as the
merchant-of
record in the transaction.
In regard to the guarantee service illustrated in Figure 1, a merchant sends
transaction information to service provider S1 or S2, illustrated by the form
of a query Ql
or Qa. The transaction information can include information not only about the
transaction
and about the merchant but also about the customer or card user. This
information about
the customer may be secured at the time of the transaction andlor the mexchant
may have
previously secured information about the customer and have stored such
information for
subsequent use, possibly securing the information from prior transactions or
possibly in
anticipation of the instant transaction.
System provider S 1 or S2 would also likely have an independent database DB
concerning transactions, cardholders and merchants. System provider S 1 or S2
would
analyze the transaction, typically utilizing specialized algorithms and other
mathematical
and/or statistical methods, and determine whether to approve and guarantee the
transaction
for the merchant, taking into account a merchant's contract and agreed fees
payment
3o schedule. The determination of whether to guarantee may depend upon a
particular
contract with a merchant including levels of risk and fee structure.
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Preferably, either the merchant or the service provider would seek standard
approval for the transaction through the usual charge card processing
networlc. The
guarantor would preferably not guarantee against a cardholder's subsequent
mere inability
(or unwillingness) to pay a legitimate undisputed transaction. Collecting such
payment and
managing such risk is historically the role of the bank or the like.
Typically, a standard
approval query AQl or AQZ for the transaction would go to card processor P
that performs
processing and settling transactions for issuing banks IB. The card processor
determines
such factors as whether the card and/or number is likely genuine and whether
funds or
credit remain in the account to cover the charge and whether the card appears
to be lost or
to stolen. The card processor communicates with issuixlg banks, either
contemporaneously or
from time to time, in order to be able to determine some or all of this
information.
Approval Al or AZ (or alternately disapproval) is returned either to system
provider S2 or
the merchant.
Given an approval, the merchant transfers the goods or services G/S to the
customer C and sends the charge information on the transaction to the card
processor,
usually in a settlement transmission ST at the end of the day. At the end of
the day, or at
some period of time, the processor settles transactions. Money MPMT is
credited to a
bank account of the merchant-of record in the merchant's bank MB. The money
payment
may deduct a standard fee charged to the merchant for processing the
transaction. A
2o transmission D to the issuing bank instructs that the proper charge card
account be debited.
Upon receipt of a statement ST (or the like) from the issuing bank IB, a
customer C
either accepts the charges and pays PMT or undertakes to cover the transaction
with
money PMT, as appropriate, or possibly declines RP to pay for part or all of
the
transactions reflected on statement ST. With debit cards C has already paid
and either
accepts or disputes. A customer might refuse or decline to pay for a
transaction for two
general legitimate reasons. On the one hand, a customer may declare that the
transaction
was not genuine, was not a transaction of the cardholder. On the other hand, a
customer
might complain that the goods and services were not delivered or were
defective. Both
declines of payment by a customer might result in a "chargeback" to the
merchant in the
system.
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If the card was presented to the merchant and the system approved the
transaction,
the issuing bank generally bears the loss when the charge was not genuine,
that is, when the
charge did not originate from the genuine cardholder. If a customer's decline
of payment
RP was for goods and services purportedly defective or not delivered, the
issuing bank or
its processor attempts to determine whether the merchant should bear this loss
because the
goods and services were in fact defective in some way or whether the customer
is
dissembling. The procedures involved for the issuing bank or the processor to
resolve
those disputes and determine legitimate "chargebacks" to the merchant is time
consuming.
For such reasons measures are typically instituted to limit the number or
percent of
1 o chargebacks in the system.
In the case in which a card was not physically presented by a customer to a
merchant, the merchant generally must pay a chargeback associated with a
cardholder's
refusal to pay RP, whether the refusal is bogus or genuine. The merchant's
bank account
will be debited for the amount of the chargeback by the processor, indicated
by payment
CB illustrated running between the merchant's bank to the processor. (Of
course, the
issuing bank and/or the transaction clearing system ultimately bears the loss
if the merchant
by this time cannot refund the money, if the merchant's account is no longer
good for the
money, and the customer cannot or will not pay.)
Also shown for interest in Figure 1 is that card associations like Visa,
Mastercard
2o and the like typically receive a fee Fl from a card processor for every
transaction. This fee
will typically be a percent of the fee charged the merchant. A further percent
of that fee F2
is typically passed on to issuing banks IB. '
Figure 1 illustrates processor P sending a chargeback notice CBN1 and/or CBN2
and/or CBN3, or a "pre-notice", also indicated by arrows CBNl and/or arrows
CBN2
and/or CBN3, to server Sl, server S2 and/or merchant M. tTpon receipt of such
notice or
pre-notice by a server from a processor or merchant, guarantor server S1 or
S2, as a
condition of the gu~.rantee service, can pay the chargeback for the merchant.
Preferably S 1
or S2 receives whatever collection rights might exist in regard to the
transaction in
exchange. In return for the guarantee service the merchant pays server S 1 or
S2 a fee F4.
3o Figure 2 illustrates how upon receival of a chargeback notice CBN or a
chargeback
pre-notification CBN server S1 or S2 would pay the guaranteed chargeback on
behalf of
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the merchant. The payment could take a variety of paths such as to the
merchant, to the
merchant's bank, to the processor or to the issuing bank, illustrated by
guaranteed
chargeback arrows GCB1, GCB2, GCB3 and GCB4.
Figure 3 illustrates that the server S 1 or S2 would acquire rights from the
merchant
and/or the processor or issuing bank to pursue payment from the cardholder C
when
possible. Figure 3 illustrates server S 1 or S2 negotiating, indicating by
arrow N, with
customer C and potentially C making some payment to server S 1 or S2 indicated
by arrow
CPMT.
Issuing banks and/or the processing system might contract with a service
provider
to to assist in resolving part or all disputed payments from customers,
whether or not a card
was presented. The issuing banks processors or processing system, directly or
indirectly,
would cover the cost to the guarantor server for this service. Issuing banks,
processors or
the processing system might also, directly or indirectly, bear the cost for
the guarantor
service to guaranty the risk of loss from merchants in collusion with
cardholders. In the
situation where a merchant is in collusion with a cardholder, there may be no
funds of the
merchant or the merchant's bank account to pay for the chargeback, resulting
in the bank
bearing the ultimate risk in loss. The service providing guaranty might also,
for a fee,
assume the risk of such losses for the bank.
The foregoing disclosure and description of the invention are illustrative and
2o ea~planatory thereof, and various changes in the size, shape, and
materials, as well as in the
details of the illustrated system may be made without departing from the
spirit of the
invention. The invention is claimed using terminology that depends upon a
historic
presumption that recitation of a single element covers one or more, and
recitation of two
elements covers two or more, and the like.
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