The pandemic has spurred a shift in the payments ecosystem, as businesses of all stripes have seen the need to keep cash in the till, to eye the ripple effects that may ripple across their supply chains — especially as disputes take shape.
The would-be traveler who finds a trip suddenly canceled may demand a refund. While eCommerce and card not present transactions may have their conveniences, they are also breeding grounds for fraud.
Against that backdrop, payments processors such as Square and PayPal have held back at least some merchant payouts — waiting for, as the Wall Street Journal reported, several days or even weeks, to deposit funds to client firms’ accounts.
That’s a strategy designed, in part, to insulate the processors from the impact of refunds. In one shift, Square has said that it had started holding back 30 percent of some firms’ transactions for as many as four months, as the Journal reported.
Square, for its part, has said, on a section detailing the rationale behind reserves on its site, that fewer than 0.3 percent of its millions of sellers had reserves in place on their accounts.
“Reserves are a standard tool used by payment processors and other financial institutions to protect buyers and help account holders avoid a negative balance as a result of situations like chargebacks,” the processor said. “At Square, we use a ‘rolling reserve,’ in which a percentage of a seller’s processing volume is set aside and released on a rolling basis. These funds still belong to the seller and are only used if that seller is unable to cover disputes, if no disputes occur, they receive the full amount.” The firm noted that the reserves help expand the platform as it can serve riskier sellers — such as those that take prepayments.
Here’s the rub: When charges are disputed, a merchant may typically cover the charge. But the current economic environment has seen millions of firms face financial pressures they’ve never faced before — and small- to medium-sized businesses (SMBs), in particular, have been vulnerable to going out of business entirely. That would leave the processor handling and ultimately being on the hook for the disputed charges. Square said in its latest quarterly report that its provision for transaction losses was $79 million, up 300 percent from last year.
PayPal, for its own part, has said on its site that reserves can be done on a rolling basis, where funds are released on a scheduled basis, or can be done as a minimum reserve. In its own first-quarter results, PayPal said that its transaction and loan loss rate was 31 basis points, up from 21 basis points a year ago.
The ripple effects are palpable and will be sustained through the pandemic. Navigating cash flow volatility is a challenge hitting all players in the ecosystem — processors and merchants alike.