Digital Transactions Authoritative, insightful and timely information for payments professionals
There’s been a lot of buzz around recent reports—notably one in The New York Times—that Square has been withholding money from merchants. Apparently, with little to no warning, the company has been holding back up to 30% of merchant sales in some cases.
The merchants affected, obviously, aren’t pleased. With the uncertain economic conditions we’ve collectively experienced in 2020, waiting months to collect a third of your expected revenue can cause significant disruption to the livelihoods of those involved.
For their part, Square says the company has the right to withhold funds per their terms and conditions, and that they’ve done so to protect against risky transactions or customers asking for their money back during a period of economic upheaval. Many of the businesses whose payments are being held up claim to have documentation showing that they don’t have any returns or risk flags. So, what gives?
At the heart of the issue may be a discrepancy between how a business usually accepts payments, and how they’re being forced to change during the era of isolation and lockdowns.
Because card-not-present (CNP) merchants are considered inherently higher risk, they generally pay higher rates. And many are required to have a rolling reserve account, as they’re liable for fraud. A cardholder can technically dispute a charge for up to 180 days after the transaction, so most processors require a rolling reserve to cover themselves in the event there is a chargeback. The rationale is that a merchant either may not have the money or may have gone out of business.
What Covid has done is to accelerate the shift from card present (CP) to CNP. Mastercard announced that in April 2020, 50% of its transactions were CNP. That’s a 40% increase from April 2019. That shift is in part due to the fact that businesses that were almost entirely CP are now primarily CNP, as pick-up and delivery have become the norm.
That means that businesses that had been underwritten as CP merchants (low risk) are now considered CNP merchants (higher risk). So, while these sellers may not have had a history of chargebacks, Square likely figured that their move to accepting primarily CNP transactions could lead to an increase in chargebacks.
Square could very well be on the hook for chargebacks because it doesn’t utilize EMV 3DS, which shifts the liability for fraudulent chargebacks to the card issuer. Because of this, and the possibility of businesses failing, they implemented rolling reserves for the merchants in question to account for the increased risk and potential increase in chargebacks. While rolling reserves are a common policy for many payment processors, the added protections of 3DS 2.0 could see their usage drop due to a lack of necessity.
Square has asserted that they legally had the right to hold back funds according to their terms and conditions. And, as far as we know, the legality of what’s happened isn’t really in question. However, holding back payments without warning and without a real explanation of why—other than saying “it’s our right to do so”—was avoidable. A better explanation could have soothed some raw feelings.
Unfortunately, it’s not out of the realm of possibility that other processors could do something similar to what Square has done if economic behavior and trends continue. Whether you use Square or not, if you’re a merchant whose business is shifting from primarily CP transactions to CNP transactions, call your processor to discuss possible rate changes and reserve policies. Ultimately, the acquirer that a processor uses will have its own risk appetite, which will dictate rates and reserve policy.
—Yitz Mendlowitz is the chief executive and co-founder of New York City-based PAAY LLC.
