Payment card acceptance relies on a series of risk dispersed throughout the ecosystem. On the credit side, issuers must calibrate creditworthiness. On the merchant side, processors and acquirers must estimate the potential of business failure to ensure that disputed or flawed transactions can settle properly.
In the simplified world of Square, merchants often see their acceptance devices as an easy way to enter the world of payments. Buy a $10 device, plug it into your phone, and away you go; you can accept payments. However, do not forget to read the fine print. Do not expect all the money as the transaction clears and settles. Processors and acquirers must protect against merchant failure, and one way to do it is to slow down the settlement process.
The Morning Call picks up a NYT report on angst at Square merchants.
- Jack Dorsey has won plaudits for his corporate activism during the coronavirus crisis, taking on President Donald Trump in his role as Twitter’s chief executive and donating nearly a third of his total wealth to pandemic relief.
- But at Dorsey’s other company, Square, a payments business where he is also chief executive, he is facing a growing chorus of unhappy customers.
- Thousands of small enterprises that use Square to process their credit card transactions — including plumbers, legal consultants and construction firms — have complained that the company recently began holding back 20% to 30% of the money they collected from customers.
- The withholdings came with little warning, they said, and Square asserted the right to hang on to the money for the next four months.
- Square told them that it was doing this to protect against risky transactions or customers who demanded their money back.
Merchants do not like the process, and it is evident that they do not understand the risks associated with payment acceptance.
- “It may not be the coronavirus that puts us out of business but the greed of Square that breaks the camel’s back,” said Jesse Larsen, owner of PennyWise Contracting, a construction company in Olympia, Washington.
But, Square has been forthright in explaining the issue.
- On Tuesday, Square published a blog post to explain its new “rolling reserve” policy, the one that some merchants have experienced. In the post, which Square shared with The Times ahead of publication, the company said it had begun holding back money late last year and expanded the practice after the virus-related lockdowns as a way to protect consumers against losses. It said it had put reserves in place on only 0.3% of its millions of merchants.
- Keeping back parts of a transaction is legal. All payment companies have policies that allow them to hold back some portion of money from businesses if there are indications of trouble.
Don’t think this is a new issue. Merchant acquirers must balance the risk of payment acceptance to the reward of acquiring. It is done through a sliding scale. Interchange and transaction fees are one part of the equation; liquidity and clearance timing is another. Here is a perfect example from the Great Recession.
Beleaguered Frontier Airlines took First Data to court in 2008, claiming that First Data was holding back funds. First Data requested and won protection because of inadequate collateral.
As businesses navigate COVID -19, more issues like these will resurrect. Still, merchants who have been quick to link up with acquirers in payments must understand the fine print and know that their transactions represent a risk. Every player in the value chain must protect against various threats, from fraud management to liquidity.
Credit risk management is a fascinating aspect of payments, requiring both art and science. Managers must ensure that the cardholder is capable of assuming the charge through credit line management, but they also must consider how markets move. Will merchants be able to deliver on the promise of their goods or services? And if not, how is the network protected should the merchant fail. And, with that comes the issue of calibrating how quickly the merchant should be paid.
Expect to see more merchant issues. They will not likely affect simple transactions, such as dining, where food is consumed and the transaction is complete. But expect issues on more complex transactions where items must be delivered, or produced, according to specifications.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
