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Tell Us Your Fund Holding Story
In case you are unable to see the presentation, or if you prefer reading, here is a summary:
Credit card processors place holds on funds primarily due to risk. This risk comes in three main forms: Merchants closing accounts while still owing fees, Chargebacks, and Fraud. But how do these things cause risk for processors?
The answer is simple, really: merchant accounts are not depository accounts like checking and savings accounts. Rather, they are considered a “line of credit.” Think of it like this: When a customer pays with a credit card, a bank is extending credit to that customer and making the payment on his/her behalf. Additionally, processors pay merchants before the banks collect from customers and are therefore extending credit to the merchant. Essentially, credit card processing companies act as middlemen between banks and merchants and accept responsibility for issuing debits and credits between the two. As middlemen, they can be left holding the bill if a bank is owed money but they are unable to collect from the merchant. For example, imagine that a customer is charged for a large purchase (either knowingly, or fraudulently). Shortly after the transaction the merchant goes out of business, or if a fraudulent company, disappears to never be seen again. Later, the customer disputes the charge, thereby initiating a Chargeback (In many cases, customers have up to 180 days to dispute a credit card charge.). Since the merchant no longer exists, the processor must pay the bank even though it can’t collect from the merchant. In fact, Chargeback scenarios are one of the most common ways that processors suffer losses; however, merchant fraud is also a great concern.
In summary, credit card processors place holds on merchant funds in order to shield themselves from the risk of chargebacks, suffering losses due to merchants conducting fraudulent transactions, and fees that may not be recoverable due to a business closing. An inability to deposit or withdraw fees from a merchant’s checking account, potential losses posed by high-risk business types, and transactions where the probability for Chargebacks or fraud is higher than normal are also significant risk factors for a processor.
[Related: “High Risk” Merchant Accounts Explained]
Keep in mind that each processor may have its own policies regarding what types of transactions it will hold and when/how long it will place holds. Some processors handle these situations well and others do not. If you feel that you are at a higher risk of experiencing holds, be sure to present your concerns with the processor prior to setting up an account.