When is a transaction not "normal" and considered a cash advance?

Question

I had recently opened a Wise account which required an initial deposit to be active. It had an option to make the initial deposit by credit card. One of my credit cards froze the website and the bank ended up calling me. They said it counted as a money transfer instead of a purchase so it didn't go through. I tried another credit card. It worked but applied a $5 fee because it counted as a cash like transaction. I called and asked for and asked what this mean. They said it happens with things like cash advances or when buying chips at a casino.

Can anyone elaborate? When is a a credit card transaction considered a normal transaction and when is it considered something else like a cash advance? Do the credit card merchants somehow know what it is you're buying and apply different rules depending on what category it falls into?

Answer 1

It may vary a little between credit card issuers, and particular cards, but in general:

When is a a credit card transaction considered a normal transaction and when is it considered something else like a cash advance?

It's considered cash when it's "cash-like", which I realise is more than a little circular. An example from the T&Cs of Barclaycard, a large UK CC issuer:

• Cash withdrawals (this includes any fees other people or organisations may charge for the withdrawal)
• Buying currency or travellers cheques
• Cash-like transactions, including: – sending money orders or wire transfers – buying digital currencies, including cryptocurrency such as Bitcoin
• Gaming transactions, including: – gambling – betting – transactions relating to gaming such as buying lottery tickets or gaming chips, or spending on a gambling website or at a gambling establishment

Do the credit card merchants somehow know what it is you're buying and apply different rules depending on what category it falls into?

See this answer to a similar question; broadly, "yes".

Answer 2

On normal transactions, the merchant pays some percentage (say 4%) of the amount in fees. They just charge more, up-front, to everybody. So, your 1000$ PC is advertised at 1040$, because the merchant knows many sales will be credit.

Now, you would be unhappy if there was a cost of 4% to open your wise account. Alternatively, the merchant can't swallow this fee and let you have a 1000$ on a 1000$ deposit, they'd be losing money.

So, they have an agreement with the credit card company that they will tell them it is a cash transaction. They then pay almost no fees. But the credit card company allows it because they then turn around and charge you some fees for it.

So, bottom-line, any place the merchant can't hide a percentage of fees will be passed on to you. They call this "cash transactions". The credit cards company probably have some rules to limit it to transaction that act like cash, e.g. accounts opening and casinos.

Answer 3

The general principle is that buying something that you can then use to buy something else, with the full flexibility and buying power of cash or close to it, counts as "cash-like". Transferring money into another account usually qualifies, because you can then use the money in that account to pay for other things.

Credit card companies know that a transaction is cash-like because the business receiving the money tells them that it is.

Answer 4

If it's fungible to cash, it's a cash advance

That is, if it can be converted to same value cash easily.

Classic example: Walk into a casino and buy $5000 in poker chips on a credit card. Take the chips to a cashier and cash them out and have $5000 cash. Well, now you've just done a cash advance.

Classic counterexample: Walk into Taco Bell and buy a $20 Taco Bell gift card. That is not fungible to cash; Taco Bell won't give you $20 for it. It is only good for Taco Bell food. You could sell it for cash, but but you'd get less than $20 for it because the person would not trust you as much as they'd trust Taco Bell to give them a $20 gift card).

But a general purpose gift card, such as a Visa Gift Card, is again back to "cash-like" because you can buy almost anything with it that you can buy with cash.

This is enforced by the flow of money (service fees)

When you use a credit card at a merchant to buy goods, the merchant does not charge you a surcharge for using the credit card. However, they themselves pay fees of between 2 and 5 percent to the credit card clearinghouses. The merchant chalks this off as a cost of doing business, and has some advantages over cash which mitigate its cost. Indeed, many new merchants are going to credit card only.

However, when you buy something which is fungible to cash, the seller has a problem. If you buy $5000 in casino chips and immediately walk to the cashier and cash them out, what happens? The casino loses 2-4%. That won't do.

So the banks give the casino a way to do the transaction as a "cash advance". That way several things happen. You pay the transaction fees instead of the casino. It comes out of your "cash advance" credit limit on the card. And, the casino gets special protection in the event you attempt a "chargeback".

Companies which sell general use Visa or Mastercard gift cards do the same thing, because a Visa gift card is substantially fungible to cash (or Visa would certainly claim so!)

Now why doesn't Taco Bell do that? Well #1 Visa and Mastercard may not let them since the card is fungible for Chalupas, not cash lol. #2 it's bad customer relations. #3 they'd need to educate their staff to process it that way.

Answer 5

Do the credit card merchants somehow know what it is you're buying and apply different rules depending on what category it falls into?

As the other answer mentioned, MCC codes are usually used for such purposes, which can sometimes lead to "unexpected" situations, for example:

• sometimes, buying lottery tickets and gift cards at supermarkets may be coded as groceries;
• sometimes, cash transaction charges are applied to purchases of postcards or office stationary at e.g. post offices where they also handle money transfers.

If only MCC codes are used, the processor does not know exactly what you bought, only the total amount.

To prevent abuses of cashback or other incentive programs, card processors have now started to request or require more detailed data, under a more favourable fee conditions or as a condition to participate certain promotion campaigns. These details are commonly referred to as Level 2 and Level 3 card data (in the U.S.).

L2 data usually involves the purchase order number (or customer reference) and the tax rate/amount included in the total amount, sometimes also the general destination address for online merchants. L3 data on the other hand usually contain all the information on your receipts, including the product identifier and product types of every items you bought.

Different card processors and networks may or may not offer all levels of data processing for all or any merchants.