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Processors Prepare for Increasing Merchant Chargeback Losses and Look to Increase Reserves

A FinTech lawyer reported that as many as one-fifth of his merchant clients have been contacted by their payment processors about the possibility of increasing their reserve requirements. This comes as Square increased provisions for merchant transaction losses to $79.3 million in the first quarter, a three-fold increase from the same quarter last year.

The pandemic has not only made business more difficult for many merchants, but also the acquiring banks that underwrite their merchant accounts. Payments and FinTech attorney Darvin Davitian, along with colleagues at their law firm, recently published a blog post about the concerns of processors who cite deteriorating merchant finances along with increasing non-delivery and other chargebacks across their portfolios. As merchants have reduced outlooks with elevate chargebacks, more acquirers and looking at merchant reserve requirements and if they need to be increased.

While processors are examining this on a case-by-case basis, Davitian reports that between 15 and 20 percent of his law firms merchant clients have been notified by their acquirers about the possibility of their merchant account reserves increasing. Davitian states that a typical practice is for processors to give merchants 3 to 5 days to increase the reserves in their account, and if they fail to do so the acquirer will withhold settlements until the reserve requirement is met. This year has been far from typical, however, and processors are more apt to have a conversation and negotiate with their merchant clients during the pandemic and business disruptions.

Chargebacks have increased greatly in the travel and entertainment sector where consumers cancel or don’t take trips and dispute that a credit or refund should be provided. Online retailers have had issues with fulfillment trying to keep pace with the increase in online order volumes leading to non-delivery chargebacks. Meanwhile fraudsters have been exploiting the pandemic for their own financial gain, leading to increases in 3rd party fraud.

Advice from the payments and FinTech law firm for merchants is to develop documentation to show they have a grasp on overall financial conditions and their chargebacks, review their processing agreements and keep an open line of communication with their processors.

They also outline eight common reasons that trigger processors to increase merchant reserve requirements, including:

  • Excessive chargebacks/disputes or refunds

  • Deterioration of merchant’s financial condition or credit

  • Merchant being placed on the MATCH list or other monitoring programs

  • Merchant default under the processing agreement

  • Violation of card network rules

  • Increase in time between settlement and fulfillment

  • Increase in risk factors determined by the processor

  • Compliance violations

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