Credit Card Processing Info

Credit Card Processors Demand Cash Reserves: Why merchants should be on the look out

May 4th, 2009

Due to many companies going bankrupt, some credit card processors are requiring “high risk” merchants to maintain a cash reserve. Creating a cash reserve protects the processor against the possibility of customers demanding refunds after the company has gone out of business.

A cash reserve are funds that are held separately in case your business fails, so the processor has a certain piece of mind that they are not going to lose money if your business goes under. Surprisingly enough, processors are allowed to do this because many of them state the possibility of cash reserves in their contracts.

How do processors issue cash reserves? Well, they simply hold back money from approved transactions without warning. Many merchants are not even made aware of what’s happening and have no idea this is going on.

The amount a processor holds is based on the amount of transactions your business has made in one to two months. So, some merchants are losing two months worth of transactions and have no idea why this is happening.

I’m sure you’re wondering why processors are doing this to businesses that they believe pose a risk. Once a processor clears a company’s credit card transactions, the processor now becomes responsible for providing customer refunds.

According to Business Week’s article, some merchants do not pose as a risk, yet are being required to have a cash reserve. On the other hand, some merchants may attempt to try and beat the system by requesting fraudulent returns to keep their business up and running and put some cash into their pocket at the same time. To prevent this, processors are providing a cash reserve. This is to prevent possible scams from happening; however, processors need to make sure that they are issuing these reserves to the right merchants who actually are a risk.

Although, the cash reserve looks like a scam, it is to help the well being of the processor as well as the merchant. Be sure that you talk to your processor to see how a business appears to be a risk and how you avoid losing a large amount of transactions to a cash reserve.

You can also feel free to contact us with any questions that you may have regarding this topic. We would be happy to elaborate on this important issue.

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