This article is being published to give a little insight into credit card processing – merchant account security deposits.
Underwriters? Is someone evaluating risk? Yup. It is important to understand that when you sign up to accept credit card payments from your customers, you are actually borrowing money. When the acquiring bank transfers cash to the merchant, it is assuming the risk that there might be a chargeback. That risk will remain until the transaction (which may, for instance, include shipping time) is completed and the warranty on the goods (which may last a long time after delivery) has expired.
Despite that risk, the acquiring bank will put the transacted funds in the merchant’s account a couple of days after the transaction is reported. The acquiring bank sees this as a loan and that’s why when you apply for merchant services, your credit rating to borrow the amounts that your business generates in credit card transactions will be evaluated.
I first was intrigued with credit card processing — also known as merchant services back in the early 80’s when I was riding my bike. I pulled into the local bike shop and decided to buy a bag that was to go on the back of my seat, it was so expensive for just being small accessory that I asked the salesman (owner) if he can give me a break on the price. I’m not the type of person to haggle about prices but it was fifty dollars back in the 80’s which was a lot back then. He did give me break, but when I handed him my American Express card for the purchase, he flipped out and started shouting “Oh you’re going to use plastic”! I left the store without making the purchase since he starting acting like a morron. I think that he may have also scared off the other customers in the store.
That was my first experience with credit card processing. Decades later while running my own business, I noticed that my merchant account provider had not made some deposit into my account. It turned out that my credit card processor noticed an increase in my business, so they decided to hold about $15,000 of my expected deposits as a security deposit should anything go wrong with my business, this way they would be able to cover their loses should my business go under and customers start requesting chargebacks for products or services not rendered. I was surprised that they had held the money mainly because we never have customer charge-backs. The fact that they held the money didn’t phase me too much, because I do read contracts before I sign them, so I was aware of the possibility. But my wife who was my business partner couldn’t understand how they could do that. But that’s not so say that it will happen to you, hopefully it wont.
Many merchants also are not aware of the possibility that their funds can be held. On a better note, if you have a good processor they will hold-back a small percentage of your funds from your deposits until they reach the security deposit amount that they need.
In my case there was nothing that I could do about. I called them to no avail, as they said that they will hold it for at least eight months and if by then my account remained in good standing, that they might release the funds. I went on, kept the account in good standing with no chargebacks and then reached out to them eight month later and asked for the money, which they did finally deposit into my account.
Basically, I had a bad processor which just went ahead and took all my money at once. This kind of processor could cause your business to go under as most businesses rely on their deposits to make their payroll, purchase supply’s etc.…
I always wanted to get into the credit card processing business and it took this situation for me to investigate the industry further where I then became a credit card processing agent.
Get the support you need for credit card processing with Ignite Payments. Merchants can rely on Ignite Payments for processing credit card authorizations or support via phone 24-7.