Tuesday, July 19th, 2022
Credit card processors have their own risk management programs and may be able to secure your business accounts by gaining control of them through receivership proceedings.
In such instances, credit card processors often take over a merchant’s account, but in contrast to receivership, they do not typically assume all of its obligations.
Instead, credit card processors place limits on how much money can be taken from the account and how much time it can take before funds are returned to customers.
So why do processors hold funds?
Risk Mitigation is the Primary Reason
Credit card processors hold funds to protect themselves from any risks when handling customer payments through their services.
Credit card processors are like a middleman between merchants and banks and can be held liable if there is a dispute between them.
Therefore, they protect themselves by:
- Charging merchants fees for processing payments on their behalf, which help cover any losses if they fail to pay out on time or at all.
- Placing limits on how much money can be taken from the account
So what risks do processors watch out for:
-
Chargebacks
Chargeback cases occur when a customer files a claim against their credit card company for an allegedly fraudulent transaction made by an authorized user on their account.
In such a case, the credit card company may ask for payment from its processor to pay off its liability for refunding the disputed amount back to its customer.
The processor, then, has no choice but to retain some of the funds to pay off its liabilities if it loses in court and is unable to collect from its customers.
Most card issuers require credit card processing companies to hold onto some portion of their customer’s transactions to protect themselves against fraud or chargebacks.
-
Protection if a merchant quits business after taking customer payments with no product delivered
Credit card processors are responsible for collecting funds from credit card transactions and then remitting them to the bank.
If a merchant exits business after collecting customer payments (with no service/product delivered), the processor must repay the bank as the merchant account is no longer available.
Last Words
The number one reason credit card processors retain merchant funds is to cover their costs. This doesn’t mean they can keep every dollar they receive, but they hold on to some of it.
The important part here is that card processors have built-in safeguards to prevent liability claims of any kind. If a merchant gets too far behind on his or her payments and ends up losing money, then the processor will always be there to pick up the slack.
Topics discussed in this article:
- Articles
- Credit Card Processors
- Management Programs
- Merchants Account