Lately on the news we have been hearing how major credit card companies are raising the interest rates on consumer and business credit cards, even those in good standing with no late payments.
The stories that haven’t been making the news are how some merchant credit card companies are changing the game for merchants who accept credit cards.
PayPal has always been a merchant payment processing company with a reputation of dealing unfairly with merchants. If you accept PayPal in your business I strongly suggest you read your merchant services agreement carefully for things that could surprise you in a negative way. Since many solopreneurs and home based businesses accept payment using PayPal, they are less likely to carefully read their service agreement with PayPal and may get wiped out if Paypal debits a checking account belonging to the merchant. My advice if you use Paypal is to have a separate checking account that you leave very little money in. Have your PayPal deposits made there. If PayPal decides that they have a contractual reason to debit your account, they won’t get much money out and you can work out your disagreement with them with your funds still in your account.
Traditional credit card processors have a duty to protect their member banks and merchants that process cards through their service. If for example, a customer has a dispute over quality of goods and services delivered, the credit card processor has an obligation to protect the consumer until the matter is resolved. The way they protect the consumer is to withhold an amount equal to or greater to the amount of the disputed charge. That way, the credit card company can decide on their own without your input to refund the charge back to the consumer. Where PayPal has traditionally leaned far to the side of the consumer, the traditional merchant credit card processors have traditionally leaned more toward the merchant in a dispute. As a merchant, the burden is on you to prove that you provided the service or product you sold met the buyer’s specifications.
Since so many services are paid for with credit cards in advance, merchant processing companies are increasingly becoming worried about businesses going bankrupt and leaving them with the obligation to refund the consumer’s money. This is particularly true in the software industry where it is very difficult to say that the software has been delivered and is working the way it was designed. Other industries that are considered high risk by merchant credit card processors are service vendors like pest control agencies, car repair companies and other industries where the service or product is often not simple.
Combine the delivery of the service or product fear with the merchant processing company’s fear of their customers going out of business and you have a situation where the merchant processing companies are starting to require some kinds of businesses to maintain cash reserves. That might not sound so onerous, but if you are a “high risk businesses” that accepts $4 million a year in credit cards, you may be looking at a $200,000 cash reserve requirement. That might be enough to push the merchant out of business thus having a self-fulfilling prophecy.
The steps you can take to protect yourselves are:
Keep track of all your merchant processing statements. Ideally they will show a low level of chargeback.
Credit cards that are swiped are considered a much lower risk than ones that are accepted via the Internet or that are hand keyed. This may not be possible for many merchants, but keep this in mind because it will affect your cost of processing.
If possible, use a local community bank to provide your merchant credit card processing services. They make their own decisions about the risk your business poses and are often more flexible than the large merchant processing companies.
Lastly, reconcile your various merchant accounts each and every month. You may not get notice that the merchant processor has raised rates or started holding back a reserve account.