- Plan for delayed cash flow. As a small business owner I was turned down by all major banks when I applied for credit card processing. Their suggestion was to use third party credit card processors. Those processors used banks to act as clearing houses for each credit or debit card transaction. As a result, my merchant fees were higher than my enterprise-wide competitor and I experienced delays in getting credit card bank deposits into my bank account. Small business owners should plan to converse cash to cover these higher expenses and delays in getting the cash.
- Plan for credit card disputes. Consumers have the option to challenge their credit or debit card purchases with the bank who issued their card. Online sales are increasing year after year. Per the U.S. Census, second quarter 2018 ecommerce (online sales) increased by 15.2% over the prior year. For small business owners to grow, many will have to participate by selling online. However, credit card processors charge higher fees for card-not-present sales. This includes purchases made over the telephone, online or whenever the circumstances require that the small business merchant enter the credit card numbers manually into the credit card processing system. Credit card processing companies consider these high-risk sales. They claim these sales are responsible for more friendly-fraud credit card disputes compared to the smaller percentage of consumer credit card disputes filed on purchases made when the card owner self-swipes the card like they do at a grocery store, gas station, or other brick-and-mortar merchant.
- Plan for Friendly-Fraud Disputes. Friendly-fraud is a type of credit card dispute where a consumer makes a purchase online and then files a dispute with the credit card issuer. In many cases the consumer filed the dispute claiming they were entitled to a refund, did not receive the product, sent the product back, or any other number of reasons why they feel they are entitled to get their money back. Small business owners who sell services online will find it very difficult to win a credit card dispute filed against an online purchase for services. In many cases these disputes are fraud. If the consumer filed a dispute against a product or service purchased at a brick-and-mortar location, it would be called shop-lifting. Consumers filing friendly-fraud disputes are on the rise.
- Plan for credit card processing reserves. Because online purchases are considered higher risk and friendly-fraud credit card disputes are on the rise, small business merchants should plan for paying high credit card processing reserves in addition to higher credit card processing fees. Reserves are those dollars a credit card processor holds in reserve in case the small business merchant goes out of business or experiences high amounts of credit card disputes. The credit card processor can then use these reserves to return the money to consumers who did not get their product or service. However, small business owners must plan for tight cash flow issues if they pay reserves. Reserves can be as high as 35% of each sale and the credit card processor can evaluate if and when the money is deposited into the small business owners account.
- Plan to apply for more than one credit card processor at a time. If a small business owner experiences a greater than 1% chargeback ratio, that is the number of dollars disputed by a consumer on a credit card sales versus the number of credit card dollars processed within a period of time, the credit card processor may place the small business owner on a 100% reserve. Which means, the credit card processor keeps 100% of the small business owners money until they determine their risk has been mitigated. How do they determine this risk? Each processor has their own rules. A small business owner cannot remain in business if 100% of their credit card sales are held in reserve for any length of time. Therefore, every small business owner should have a second or third credit card processor available to process customer sales.
I paid reserves as high as 35% and in many cases my credit card processors placed me on 100% reserves. These reserves were held for at least six months and in some cases, I was told my reserves would be held for one year. Whenever I asked to speak to their risk management department, I was never given the formula they used to determine risk. My business was the victim of friendly-fraud disputes and in many cases I lost the chargeback dispute and the consumer received the benefit of my services for free. When I hired legal advice to review credit card processing contracts, lawyers told me not to sign them. When I asked, “How do I take credit cards?” They responded with “I don’t know.” Small business owners who sell online or remotely, must be prepared for these challenges.