While the world is still amidst a global pandemic, many of us in the payment processing industry are seeing the effects on the business community in a way that no one could’ve predicted.
Good afternoon. Jaron Rice, founder and CEO of Magothy Payments. Today is April 17th and I wanted to give you an update of what is going on in the payment processing industry as it relates to COVID-19, coronavirus, whatever you want to call it.
We are in Maryland. The state is still in a state of emergency. It’s effectively shut down. This emergency has caused a ripple effect in the payment processing industry that nobody expected or foresaw but we’re experiencing right now on the front lines. And so, I wanted to give you an update of how that is looking.
One of the first things is that a lot of the processors right now are experiencing a ton of chargebacks. If you’re new and don’t understand the merchant processing industry, a chargeback is when a cardholder essentially tells their bank, “I didn’t authorize this transaction,” or “This company, person, ripped me off. This is not what I paid for.”
Normally, the chargeback window for VISA and Mastercard is 120 days from the date of the transaction or the delivery of goods and services, whichever is later. For AMEX and Discover, it’s actually one full year. Let’s say there’s a home improvement company. They replace a roof for somebody and three months later it’s leaking, and that home improvement contractor doesn’t answer their phone, doesn’t have any sort of customer service, that customer can call their bank and say, “This company ripped me off.” The bank will then forcefully take those funds from the business and hold them in escrow for 30 days while they explain themselves.
Now if the company doesn’t have the money, then the acquiring bank that authorized the transaction is responsible for paying back the cardholder. That’s what we’re seeing a ton of right now. There are a lot of business that are experiencing higher chargebacks than normal.
If you are in the wedding planning industry or you’re an event planner, you have a venue or you’re a caterer, you’re a losing company, or something like that, and people are booking deposits months in advance and COVID-19 comes around and basically cancels every event that you’ve had planned for the next several months, there are going to be a lot of cardholders that want their money back. Even in this situation, the best customer service is not going to prevent chargebacks because there are some cardholders who are just not in a position to be patient. They need their money back because their daughter’s wedding has been canceled or postponed, and that several thousand dollars that they shelled out? They want their money back.
What we’re seeing is that a lot of these processors are getting hit with tons and tons of chargebacks that their clients, the merchants, the businesses don’t have the money to fund. And so, we’re seeing a lot of the banks circle the wagons and scrutinize transactions a lot more.
At Magothy Payments, we focus a lot on the card-not-present high-dollar transaction space, and so we’re seeing it a lot with our clients where they’re running large transactions. Even with proper documentation, they’re showing a signed agreement, they’re showing a payment authorization, the processor is holding funds until they get confirmation from the cardholder that the service has been performed or that the items have been delivered.
In times past, they didn’t require all of that confirmation. But now they’re starting to protect themselves. We’re dealing with a situation with companies that sell and supply medical devices and COVID-19 masks and things like that. In times past, that business, when they were ordering from their supplier, they were on a net 30 or net 45 payment window where they can order 1,000 masks and then their supplier would give them 30 to 45 days to pay that. They would order the masks. They would have them in stock, and then when their customer comes around and wants to buy masks, they sell them. They have them in stock. They collect the money from their customer, and then they pay their supplier. What is happening is these suppliers are now requiring that the merchants pay up front. So instead of being net 30 or net 45, it’s, “No. Pay me now.”
Business that are going through a cashflow crunch are having to shell out up front for their supplier. And then when they collect from their customer, if it’s a large transaction, those funds are being held. They’re having to ship out the goods and make sure that their customers get it. And the acquiring bank is calling their customer to make sure that the items have been delivered and that they’re happy with it before they’re releasing those funds. It’s creating a huge crunch because now the processors are not allowing prepayments on large transactions.
What’s happening is a lot of manufacturers of COVID-19 masks and personal protective equipment, they are running out of stock. They can’t provide. If you have a business that collects from their client, “We’re going to sell you 1,000 masks,” their client pays with a credit card and it’s let’s say at $10 a piece it’s a $10,000 transaction and they’ve got the money from their client, they place the order with their supplier and then their supplier takes their money, but then there’s a backorder. And their supplier is saying, “Oh, we can’t get it to you for 30 days,” which causes a crunch because they haven’t gotten the money from their client. They can’t deliver, and it creates this ridiculous cycle that is affecting everybody.
This is very common right now, unfortunately. If you work with any of the major processors, any of them, all of them will tell you that they’re dealing with the same thing right now. If you’re dealing with it, hopefully you have a merchant services provider or a rep that is very communicative and let’s you know what’s going on and updates you on the progress of getting these funding delays rectified.
It exacerbates the problem because most of these processors, the people in their loss prevention department, are working remotely, and so they oftentimes are not available by phone. It’s a difficult mess. This is happening across the country, across the world. It is a big problem that we’re seeing right now.
If you’re experiencing it, you’re certainly not the only one. Eventually we’ll get past this as things improve and people start going back to work and there’s less of a cashflow crunch. But if you’re dealing in the space where your customers are accepting large card-not-present transactions, prepare yourself for funding delays because this is just par for the course.