It is almost inconceivable for a business operating in today’s non-cash society not to offer its customers the opportunity to pay with a credit card. Every company needs an electronic payment solution, which means that every company must enter into some arrangement with one or more credit card processors to effect credit card sales. Typically, under these arrangements, a merchant will agree to accept credit from its customers (cardholders) who properly present a credit card at the point of sale, subject to certain conditions, with payment to the merchant to be made by the credit card processor after the credit card processor’s receipt of payment from the cardholder. Generally, all the payments by the credit card processor are indeed conditional and subject to chargebacks, fees and fines. In some instances, the credit card processor may, in its own discretion, suspend payment of any funds if an event of default has occurred (under either the processor’s agreement with the merchant or the cardholder), or if the credit card processor has reason to believe that there may be fraudulent activity relating to transactions submitted to it by the merchant. Chargebacks to the merchant can result from, among other things: (a) a cardholder disputing the validity of a transaction; (b) a cardholder disputing the quality or receipt of goods or services; and (c) a copy of the sales draft was not provided upon request. It is important to recognise that these chargebacks can occur under the processing agreement even if there may be no or little evidence to support a dispute, the result of which is that the merchant’s receipt of payment for credit card sales may be further delayed pending resolution of any dispute. Making matters worse, in some instances, the merchant now is left with no alternative but to expend the time and resources necessary to recover on these chargeback transactions, which in essence represent accounts not purchased by the credit card processor.
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Further complicating matters, credit card processing agreements typically authorise the processor to establish a Reserve Account “in an amount to be set up” by the credit card processor in its sole discretion, based upon, among other things, processing history and the potential risk of loss that the processor may determine from time to time. If the amount in the Merchant Account is less than the required reserves in the Reserve Account, the merchant will be obligated to pay the shortfall. The Reserve Account may also be funded from funds otherwise going to the Merchant Account without notice. In some instances, this Reserve Account can be held for the greater of 270 days after termination of the credit card processing agreement or for such longer period of time as may be consistent with the processor’s liability for credit card transactions. The processor can also unilaterally require an inspection of a merchant’s business at the merchant’s cost and expense.
Credit card sales do not always result in actual cash revenues to a merchant, and even when the merchant is paid, payment may occur significantly later than the actual underlying sale.
In short, credit card sales do not always result in actual cash revenues to a merchant, and even when the merchant is paid, payment may occur significantly later than the actual underlying sale. Here are five recommendations that a merchant should consider when trying to effectively manage credit card transactions for its business, given the necessity of credit card sales and the complexity involved:
- Read and Understand the Processing Agreement.
This may seem obvious, but the importance of a merchant really knowing the terms of its credit card processing agreement is crucial. For example, most credit card processing agreements provide for a maximum “Combined Estimated Monthly Volume” and “Estimated Highest Ticket/Sales Amounts” associated with every credit card facility—if the merchant exceeds these amounts, the credit card processor may hold the merchant funds pending further activity. As a result, a merchant should ensure that these terms are consistent with its projected sales; if a merchant senses that its projected credit card sales for a given month are over $100,000, for example, it should not agree to a Combined Estimated Monthly Volume of $70,000. So too, a merchant with large ticket items should ensure that the Estimated Highest Ticket/Sales Amounts work for its business sales. In addition, credit card processors impose a lien on credit card accounts; a merchant needs to make sure that the imposition of this lien does not conflict with other loan documents and lending arrangements.
- Establish Internal Coordination.
Successful merchants do everything that they can to stay within the “four corners” of their processing agreements to maximise the opportunity for collections (and in so doing, minimising potential chargeback claims). Establish processes and procedures associated with credit card sales consistent with the terms of processing agreements in place to maximise the recovery on all sales and provide for efficient and effective resolution of any potential dispute.
- Be Proactive and Plan Ahead.
Successful merchants, with knowledge of their credit card processing agreements, tend to carefully review and promptly challenge, as appropriate, (a) the imposition of fees and costs that are not otherwise provided for under the agreements, (b) the imposition of chargebacks, (c) the holdback of additional amounts in the Reserve Accounts, and (d) the timing of holdbacks within Reserve Accounts to avoid unnecessary delays in payment. In addition, successful merchants develop meaningful cash flow projections which will typically include some “reserve” for credit card sales based on prior experiences. Recognising that some sales do not result in immediate cash receipts can help a merchant effectively manage its cash flows.
- Properly Evaluate Payment History With Various Processors.
Monitor performance. Review chargeback and payment history with various credit card processors. Distinguish between those credit card processors that offer poor terms versus those that offer more favourable terms, and, within this analysis, how each of the credit card processors performs on its agreements. In some instances, despite tough deal terms, a credit card processor will not seek to hold back the maximum amount permitted but choose instead to hold back a reasonable amount consistent with the financial risk involved. Develop a means of evaluating reasonable behaviour amongst the processors.
- Shop For The Best Deal.
Negotiate the best terms possible, paying particular attention to the time in which the credit card processor may holdback money in the Reserve Account for potential chargebacks. In addition, pay attention to a credit card processor’s past behaviour—sometimes it makes the most sense to work with a processor under less friendly terms that has a history of only taking holdbacks in the Reserve Account for actual credit risks (as opposed to general business risk). Credit card processing is a highly competitive industry—take advantage of the competition to cut your best deal. Of course, pay attention to the best rates as well!
Credit card sales represent a vital source of working capital for today’s merchants. The ultimate choice of a credit card arrangement depends on finding a processor that both provides for reasonable terms and conditions and then demonstrates a consistent willingness to work with its merchants. Look for the right credit card processor for your company. Simply locking in the best rate may not be enough!