ISO Fields and offline transactions
ISO stands for International Organisation for Standardisation. This is a non-governmental organization headquartered in Switzerland which sets the standards for a variety of industries. The banking industry and its electronic payment processes are standardized under ISO 8535 (International standard for financial transaction and card originated interchange message).
Every time an instance (POS terminal, acquiring bank, payment scheme or issuing bank) communicates with another instance messages are being exchanged. All messages have to follow the same standard (as defined under ISO 8535) to be understood by every instance in the process. This standard says that each message has to consist of three components:
· Message type indicator (MTI)
· Bitmaps indicating which data elements (DE) are represented
· Data elements (the actual message that is being passed on)
Here are the most common ones:
MTI 0220/0230
This MTI is a special case where an already execute transaction has to be adjusted. The most common scenario is when a card user makes a combined purchase of several items and decides to return one. Let’s say that the original amount billed for all items together was 100 Euro but the returned item accounts for 20 Euro. Therefore the merchant will credit 20 Euro back to the user's card and for that, the merchant has to use the MTI 0220 request and will receive the MTI 0230 response.
Offline transactions (MTI 0120/0130)
Because some businesses are very vulnerable to an unstable network(especially the Horeca industry) and are dealing with a high volume of transactions some PSPs have equipped their POS software with an offline transaction processing option.
Once the internet connection is down the merchant can still process transactions. They will be stored on a local server and submitted for authentication, verification of funds and approval once the network is back up again. In this scenario, the customer will probably think that they paid but in fact, no amount has been authorized from their account.
At the end of every business day, the merchant will submit a batch of transactions to the acquiring bank (via the PSP) for reconciliation. If the network was restored in the meantime and the offline transaction successfully approved the offline transition will be part of the reconciliation batch and the merchant will be paid. However, if the network was not restored by the end of the business day then the merchant won’t even be able to submit the batch for reconciliation and all transactions, even the ones that occurred before the outage will be delayed.
Sidenote: Payment Service Providers have different rules around the submission of offline transactions. Some PSPs dictate that an offline transaction has to be submitted within 24 hours while others leave a runtime of up to 7 days. Also here merchants have to be in the clear when it comes to PSP imposed timelines.
Risk or opportunity for the merchant?
The obvious risk for the merchant is that she is selling merchandise to customers whose funds are not verified.
Ultimately the choice the merchant has will be between not offering offline transactions during a network downtime and losing the sale entirely or process the transaction offline and maybe lose money. The precise risk level will have to be determined by the merchant and the industry he operates in. Every merchant should know their non-authorisation rate.
Sidenote: Great article on why the authorization rate is the one metric that matters most when it comes to payments by Dwayne Gefferie can be found here.
Example of POS network issues
Some time ago, I was in Barcelona and wanted to buy some swim gear in a surf shop right next to the beach. I paid with my card but the shop employee warned me that often the network breaks down, which means that we either have to wait for a bit and try again or I pay in cash. The store was almost empty so I asked why the network would break down. He responded saying that this is due to all the selfies being taken at the beach.
He went on to explain that the shop´s network provider is Vodafone, which also is most likely to become the roaming provider for tourists…who happen to be at the beach a lot…taking selfies :-)
