During this time of social distancing and businesses shutting down, some credit card processors are freezing merchants’ funds. Why do they do this? The answer goes back to understanding our system of credit card processing.

Merchants are so used to taking credit cards and seeing money go into their bank account that they think credit card transactions are cash transactions. After all, if it looks like a duck and quacks like a duck, it must be a duck.  But perception is not reality. When a merchant opens a merchant account with a credit card processing company, it is scrutinized just as if they were opening a bank account. If the merchant were to take their merchant account negative, then certainly they would be required to bring it back to a positive. If the merchant is unable or refuses, then the credit card processor is left with the liability.

You might ask how would a merchant account get into a negative position? There could be more refunds and/or chargebacks than deposits. This situation is in fact occurring right now during the COVID-19 crisis; in particular, with merchants who take deposits up front for services later. Merchants who take deposits for upcoming events are a good example. What happens if the merchant spends those deposits on payroll and operating expenses, and then the customer asks for a refund? What if the merchant can’t make good on the refund? The issuing bank associations have all guaranteed that the customer will always get his money back on refunds. The merchant account provider has contractually accepted the liability to refund the funds to the customer. If a merchant goes negative or even bankrupt, then the merchant account processor is responsible for the loss.

The card holder is king in the world of credit card processing. The issuing bank always stands in support of its client who has been issued the credit. The issuing banks always stand 100% behind their customers when it comes to a chargeback request as well. The burden of proof is on the merchant to prove that a chargeback is not warranted, by presenting a customer signed receipt of goods or services or a customer signed contract for services to be provided in the future. This is why credit card processors perform their strict due diligence in checking merchant owners’ credit reports and checking financial responsibilities of those who apply for a merchant account.

In the case of our current crisis with Coronavirus and businesses shutting down, the processor has to be on guard for its own survival. Therefore, some merchants are being told that their funds are being frozen for a while until the crisis abates. It is “insurance” for the processor to hold some funds in reserve. Some processors may have a portfolio of more risky merchants than others, which is why some are freezing funds and others are not.

In addition, the processors underwriting departments are scrutinizing their new applicants more carefully. It is taking longer to get an approval. In our experience, many merchants don’t understand why they need to submit an application for a merchant account and why the processor would pull a credit report. It is precisely for the reasons explained here. It is because the processor has the liability for refunds and chargebacks.

Call us at 505-296-2847 if you have further questions. We are honest to a fault, and will shoot it to you straight 100%
of the time.