Consider this scenario.
You've just finished your meal at a restaurant and the bill, with taxes, comes to $45. You decide to pay with your prepaid Visa/MasterCard/American Express card. The card has $52 left on it, so there should be exactly enough room on the card for a $7 tip for your server. The waiter swipes the card. The card is then declined.
Why did this happen?
It's because of a common payments card practice (your credit card also has this feature) called "tip tolerance," and it's to ensure your server gets paid their tip.
A tip tolerance exists to make sure there is sufficient money on a prepaid or credit card for the additional money you might scribble down on the merchant receipt when you receive good service.
The term tip tolerance is often misunderstood and is commonly triggered by prepaid card holders when they try to pay at restaurants or other places that accept tips.
In fact, one Toronto couple was in the news recently when they tried to pay for their anniversary dinner with a prepaid card, which was declined in a similar scenario.
A tip tolerance is the extra 20% buffer room all prepaid and credit cards must have when purchases are made at a place where it's customary to leave a tip for service (restaurants, salons, bars etc.) to ensure there's enough money on the card to tip whoever is serving you.
If you went to a grocery store and bought exactly $52 of groceries, you wouldn't have an issue.
This 20% is calculated off the purchase total, and is "reserved" in case you decide to scribble a tip amount down on the receipt, after the card was authorized for the initial cost of the meal.
But there's Enough Money on my Card?
Let's go back to the example we gave at the beginning. Your meal comes to a total of $45 and you'd like to leave a $7 tip, which is about 15% of the total. That's a total including tip of $52, which is exactly what you have on the prepaid card.
However, when the server brings over the POS terminal and punches in $45 they have no idea how much tip you will leave after the transaction is initially authorized for $45, and neither does the card issuing bank, payment network or merchant processor.
If it was terrible service, you might leave 5%. If it was great service, you might leave 20%.
When you swiped your card, it was declined because the network actually requested and authorization for $54, or $45 + 9$ (the 20% tip tolerance).
At restaurants, all credit and prepaid cards automatically look for up to an extra 20% of funds, just in case you decided to leave extra money on the table in the form of a scribbled number on the merchant copy of the receipt.
This doesn't only happen with prepaid cards.
It also happens when you swipe your credit card at a restaurant, but because your available credit is much higher than a prepaid card's (usually small) balance, you usually don't get a tip tolerance decline.
Why Do Tip Tolerances Exist?
Tip tolerances exist to protect the waiters/waitresses, hairdressers, spa workers and other employees who rely on tips to supplement their salary.
If a tip tolerance didn't exist, the base amount for the meal you just ate could be authorized, but the additional tip you write on the merchant receipt could be more than what's available on your prepaid card or your credit card.
In this scenario, the restaurant would receive the total amount of the bill, but the additional tip you leave for the server might not actually be available on the card.
Those who rely most on tips for a living are the ones who ultimately benefit from the tip tolerance function.
What can I do if I Suspect a Tip Tolerance Decline on my Prepaid Card?
When paying at a restaurant, you'll have to do some quick math.
Make sure there is enough money on your prepaid card to cover the total amount of the meal plus an additional 20% and the transaction will be approved.
If there isn't enough on your card, remember that you can always split the bill and pay a portion with the prepaid card (keeping in mind the tip tolerance), and the rest with a credit card or cash.
You can then spend the exact remainder of the prepaid card's balance at the grocery store or anywhere else that doesn't employ workers who rely on tips.
Note that hotels and gas stations also put similar additional "holds" on card funds. As always, the exact details can be found on your particular card holder agreement.