In this series, called Payment Pitfalls, we’re going to cover some of the most common mis-steps made by merchants that can get them into hot water with either their merchant acquiring bank, their customers and even the credit card associations themselves. The purpose of this series is to share some of these common pitfalls so that you can avoid making the same mistakes made by many other unwitting business owners before you.
First, let’s define some terms: Merchant (Acquiring) Bank
Your ‘Merchant Bank’ account is provided by a bank. This is different than your business checking account in that it serves as a means by which the merchant ‘acquiring’ bank underwrites the risk that your business is exposed to by accepting credit cards.
I’m a ‘Stand-Up Merchant’. What’s the risk you ask?
Merchant acquiring risk comes in a variety of different forms. There is both customer risk and merchant risk.
Customer Risk - Customer risk comes in several forms, but it largely stems from stolen credit cards being used to purchase goods and services. This particular risk manifests when the rightful card owner disputes a charge with their card issuing bank, and the funds are ultimately withheld from the merchants account.
In many instances the merchant is left with both the loss of inventory but also a $25 charge for the chargeback. These risks largely rest on the merchant, unless chargeback limits exceed 1% of total sales in a given month. If chargebacks exceed 1% of sales, the merchant bank is obligated to close down the merchant account. This is when Customer Risk can quickly transition into the Merchant Risk category (from the bank’s perspective).
Merchant Risk - Merchant Risk largely comes from either shadier or ‘aggressive’ purveyors that make it easy to purchase but very difficult to address customer support grievances. When a merchant doesn’t provide clear contact information, or access to customer support, it is often easier for customers to simply initiate a chargeback than to hassle with a shady operator. Even worse is when a merchant sells a significant amount of products or services and then decides to ‘fold up shop’, leaving the merchant bank exposed to all chargeback obligations that may result when the merchant fails to respond or deliver on the deal.
Risk is typically measured in bands, and when activity suddenly exceeds the normal ‘historical or stated bands’, then merchant banks, payments processors, and issuing banks can get ‘nervous’ resulting in account shutdowns to contain their exposure to these various forms of risk.
Now for the lesson: How Refunds Go Bad
This week, we observed a perfectly upstanding Recurly merchant getting snagged as the result of well-intentioned refunds being distributed to their customers.
Here was the scenario: Merchant A was acquired by Company B. As part of the acquisition, Company B elected to shut down Merchant A’s website. This required Merchant A to distribute over $100,000 of refunds to their customers who had paid for services.
The merchant bank shut down Merchant A’s merchant bank account, and the refunds never went through, even though this upstanding company had promised their customers that refunds were on the way. Of course, end-customers were angry, and Merchant A was completely confused.
The problem resulted from the following factors:
1) Highly Unusual Behavior - The refunds were processed as one large batch.
2) No Communication - The Merchant Bank was not alerted to the situation, and their risk detection heuristics immediately detected an unusually large amount of refunds being processed all at once.
Merchant Banks get extremely nervous when they detect Merchants receiving revenue at exceptionally high rates of growth, and they also get nervous when they see highly unusual levels of refunds getting issued.
Once Merchant Bank accounts are shut down, it can require very delicate explanation and cajoling to get them reinstated. This can take days if not weeks, and can result in a tremendous amount of lost revenue for your business.
Summary: If you have to issue a large number of credit card refunds, make sure to alert your Merchant Bank before initiating the transactions. Assuming you have done an adequate job explaining your case, you will not only make your customers happy but you’ll avoid a tremendous amount of pain, stress, and lost business that can result from issuing batch refunds blindly.
Dan Burkhart, CEO, Recurly