Hit by coronavirus and 30% hold by payment processor


Payment processors tell customers they’ll take care of the nagging details. But lately, they seem like yet another headache for companies hard hit by the new coronavirus.

processors like

PayPal

PYPL 0.83%

Holdings Inc., Stripe Inc., Square Inc. and Worldpay are forcing some companies to wait additional days or weeks to access funds deposited in their accounts, citing the need to protect against possible losses when people who have purchased airline tickets, vacation packages and certain other goods and services require refunds.

This intensifies the cash crunch at many businesses already devastated by shutdowns and changing consumer behavior.

Square emailed Bluebonnet Photography, a portrait studio in Tacoma, Washington, on May 6, saying it would begin holding 30% of each of Bluebonnet’s transactions for 120 days “to protect you and Square.” , against unexpected loss events”.

“I was really left in the lurch,” said Tamara Hudson, owner of Bluebonnet. Many clients were already canceling photoshoots because of the coronavirus.

Square said in the email that the decision was based on factors including an industry more prone to payment disputes and how long the company has been using Square.

Ms Hudson said Bluebonnet has never had a disputed transaction in three years with Square. In addition to processing about $100,000 in payments through Square each year, she said, Bluebonnet offered installment financing for photo shoots through Square’s lending arm and used Square’s software to help clients book studio sessions and run marketing campaigns. Now, Ms Hudson said, she is considering dropping the business.

“I was really left in the lurch,” Ms. Hudson said of Square’s decision to start holding 30% of each of Bluebonnet’s transactions for 120 days.


Photo:

Jovelle Tamayo for the Wall Street Journal

A Square spokesperson said less than 1% of customers have been told that some of their future sales will be placed in a reserve account, typically businesses that collect payments before goods are delivered, sell goods or services. high-risk services or receive high rates of disputes.

From mid-March to late April, credit cardholders disputed two to three times more purchases than before the pandemic, according to Aite Group, a research and advisory firm. This excludes purchases reported as fraudulent.

These disputes, also known as chargebacks, accounted for 0.05% of credit card transactions before the pandemic, according to research and advisory firm Mercator Advisory Group, whose statistics include fraudulent purchases. Now, in some categories, including travel, chargebacks reach 40%.

Businesses that charge customers in advance for goods and services they promise to deliver in the future are particularly at risk. Among PayPal’s travel and event merchants, some companies were lately paying out more refunds than they were receiving with new bookings, PayPal chief financial officer John Rainey told an investor conference in May.

“Chargebacks were this little leak in the plumbing somewhere that nobody cared about,” said Adrian Sanders, CEO of Chargehound, which makes software to help merchants manage disputed purchases. Now, “this is a place where the pipe can actually burst.” (PayPal is a minority investor in Chargehound.)

Banks and fintech companies charge fees to help businesses process credit card transactions. Square’s signature white credit card readers, for example, allow businesses to accept payments with a smartphone or tablet.

Square’s payment devices make it easy for businesses to accept credit card payments.


Photo:

Jovelle Tamayo for the Wall Street Journal

When a customer makes a purchase, the funds associated with the payment pass through the customer’s credit card issuer through a network of cards like

Visa Inc.

to a payment processor like Square or PayPal. The processor then places the money in the company’s account, usually within a few days, less the portion taken for itself and other financial intermediaries.

It is usually the merchant who must cover the costs when a customer requests a refund. But if a merchant goes bankrupt, the processor can be left to cover those fees.

Processors say they must ensure that merchants’ customers can be reimbursed when requesting refunds.

The costs of disputed purchases can add up quickly for processors, who can also face additional fees from card networks for excessive chargebacks. Square reported a loss of $106 million for the first quarter after more than tripling the amount it needed to set aside to cover potential losses on transactions and loans.

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On April 1, Stripe told ThrashAir LLC, a Valley Village, Calif.-based company that flies and transports high-performance aircraft for their owners, that it would wait 14 days before releasing funds to ThrashAir’s account. . “We have noticed an increase in customer refunds and chargebacks in your industry,” Stripe wrote in an email to owner Christopher Thrasher.

Mr. Thrasher said he doesn’t blame Stripe for trying to handle a difficult situation. But he called his customer service line to complain about being unfairly grouped with harder-hit airlines when he had lost no business. After pleading his case, Stripe reversed course.

“I think they’re just trying to protect themselves, but they don’t seem to really think about the fact that it can cripple a business,” Thrasher said.

Ms Hudson said Bluebonnet has never had a disputed transaction in three years with Square.


Photo:

Jovelle Tamayo for the Wall Street Journal

Andy Ruiz was less fortunate. Stonegate Pharmacy in Austin, Texas, which Mr. Ruiz helps run, recently opened an online store to sell hand sanitizer and used Stripe to process payments.

After processing nearly $15,000 in Stonegate online sales, Stripe deactivated its account, saying it was at high risk for disputed transactions. Stripe also said it would hold Stonegate’s money for 120 days to help cover any refunds.

Stripe offers its customers an online dashboard that monitors payment trends, and it showed that Stonegate had no transactions classified as “high risk”. Mr. Ruiz spoke to Stripe’s support team about it, but was told the decision was final.

A Stripe spokesperson declined to comment.

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Even successful businesses during the pandemic have struggled. The Wild Initiative LLC, a digital and content marketing company in Red Bluff, Calif., that caters to the outdoor recreation industry, used PayPal to bill customers and get paid. It has generated so much interest recently that it has hired three contractors, said general manager Samuel Ayres.

In early May, PayPal informed him that due to an “unusually large increase” in sales activity, any cumulative sales over $10,000 would be blocked for three weeks. Mr Ayres demanded immediate access to those funds, but said PayPal rejected him.

At the end of May, Mr Ayres had to use his personal credit card to make payroll because PayPal had frozen around $5,000. The episode prompted him to switch to another processor.

PayPal softened its stance on the Wild Initiative account after being contacted by The Wall Street Journal. A PayPal spokeswoman said the company uses both data and manual reviews so it can be flexible with individual merchant policies, and hasn’t changed its typical approach as a result of the pandemic.

Mr. Ayres still has no plans to use PayPal again.

Write to Peter Rudegeair at [email protected] and AnnaMaria Andriotis at [email protected]

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