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Why Credit Card Processors Hold Funds

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Phillip Parker

on 14 January 2013

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Transcript of Why Credit Card Processors Hold Funds

Why Do Credit Card Processors
Place Holds on Merchant Funds? Risk! Chargebacks Fraud Merchants Going Out of Business
While Still Owing Fees By
Phillip Parker
CardPaymentOptions.com Why is this risky for processors? Because a Merchant Account is not a depository account
(i.e. Checking & Saving Accounts). A Merchant Account
is a
"Line of Credit" When a customer pays
you with a credit card
a bank is extending credit
to the customer and making the payment on behalf of him/her A processor extends credit to the merchant since it pays the merchant before the bank collects from the customer Credit card processing companies act as "middlemen" between banks and merchants and take responsibility for issuing debits and credits between the two Credit card processing companies run the risk of owing banks money due to merchant actions and can be left holding the bill Think of it this way: A customer is charged for a large purchase from a merchant The merchant later goes out of business The customer then disputes the charge thereby initiating a "chargeback" 1 2 3 For Example: Either knowingly or unknowingly (fraud) A "Chargeback" is a forceful reversal of
a credit card charge that is automatically
withdrawn from a merchant's attached
checking account. Merchants must supply
evidence that the customer authorized the
transaction in order to "win" the dispute. Generally, customers have up to 180 days
to dispute a credit card transaction. Or, if a fraudulent business, quietly disappears
never to be seen again. A processor still has to pay the bank even if it cannot collect the Chargeback from the merchant. Customers that "win" Chargeback disputes
get their money back Chargebacks are one of the most
common ways that processors suffer losses; however, merchant fraud is also quite common and poses great risk to processors. In Summary: Chargebacks or fees perceived as unrecoverable from a merchant due to a business closing or an inability to deposit or withdraw funds 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 Merchants conducting
fraudulent transactions Processors place holds on merchant funds to protect themselves from the risk of suffering financial losses
due to: 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. As always, be sure to research processors prior to signing up. Otherwise, you could find yourself in a world of regret! Learn more about credit card processing
and find unbiased reviews at: CardPaymentOptions.com
Full transcript