In April, Vice published this article: https://www.vice.com/en_us/article/wxem94/this-credit-card-processor-is-withholding-funds-from-small-businesses
The author describes Coronavirus’s effect on small businesses with future bookings, such as wedding photographers, truck rental companies, and hotels. All of these companies have experienced a significant drop in future bookings and revenue.
The author alleges that PayJunction proactively seized funds from deposits of future bookings that may be canceled or delayed due to Coronavirus. Is this ethical or even legal? We’re not lawyers, but we’ll describe how we think this could happen, assuming the allegations are true.
How Deposits Work In Credit Card Processing
PayJunction has been in business for some time and has tens of thousands of merchant clients, including many small businesses. These clients choose PayJunction to manage their payment processing using best practices.
On almost all credit card processing agreements, there is a section that asks the business to describe the process of accepting deposits for future delivery of products or services. Credit card processors categorize these transactions as higher-risk because many factors could cause the transaction to blow up.
Imagine buying a wedding dress with a deposit and waiting for it to arrive by boat from a foreign country. There are many ways that this sale might never complete.
Here are only some of the scenarios that could realistically happen:
- The retailer could go out of business
- The international wholesaler could fail to deliver the dress
- The wrong dress might arrive
- The dress might arrive too late
- The wedding might be canceled
- The bride might find a different dress she likes better elsewhere
- The seamstress might fail to deliver correct or timely alterations
As a result of any of these scenarios, the bride would likely dispute the original deposit and fail to pay the balance. When a dispute occurs, the original deposit is withdrawn from the merchant’s checking account. It may fail to clear if it exceeds their checking balance. The processor doesn’t want to be on the hook for the funds, making their contracts very restrictive.
How Could This Happen?
Since the agreements identify all businesses that require a deposit, processors like PayJunction likely have a database function which can easily select all of these merchants for a given action. During previous recessions, including The Great Recession, many small credit card processors suffered losses and closed.
Early reports from credit card processors show sales revenue dropped up to 90% virtually overnight due to Coronavirus-related business closures. The processors are again worried about having to close these doors.
Freezing funds specific transactions for 90-180 days isn’t uncommon for credit card processors when they suspect red flags such as fraud. However, we’ve never heard of a credit card processor proactively holding funds for a segment of their merchants, such as those who require a deposit, but the original merchant agreement likely stipulates this type of power. Most companies don’t read the 30+ page terms & conditions packet that supplements a 4-5 page agreement.
If the allegations are true, then PayJunction is choosing to keep their doors open by driving many of their small-business merchants out of business.
Don’t Tackle The Credit Card Processors Alone
Since 2009, IdealCost.com has helped hundreds of companies nationwide reduce their merchant account fees through identifying and fixing hidden profit, overcharges, fake fees, and billing errors. Clients have saved $300-$20,000 per month on their credit card processing fees without going through the hassle of changing their processing vendor, bank, or equipment. Switching credit card processors should be a last resort, only reserved for funding delays, poor customer service, or technical difficulties. Before you consider switching credit card processors, see if you qualify for IdealCost.com’s monthly savings program be uploading your most recent merchant statement for a free analysis. You’ll receive an estimate within 24 business hours.
If you are opening a new credit card processing account or must switch credit card processors due to funding delays, technical issues, or customer service problems, feel free to contact us for a free consultation. IdealCost.com can help secure the best terms and fees based on your specific needs.