Your merchant ID was shut down, leaving you unable to process credit-card payments.
What happens next? For instance, are you put on Match? Does it affect your credit? Are you going to get your reserves back?
The answer is, that it depends on a lot of things: primarily on the reason why you were terminated, the contract you signed with your card processor and your processor’s ethics – or lack thereof.
If you’re a merchant facing this nightmare scenario and even if you’re confident that it won’t happen to you, it’s worth understanding the process and taking steps in advance to limit the potential damage to your business.
First of all, if your Merchant ID [MID] is shut down for excessive chargebacks, your processor has a contractual duty to the card network to place you on MATCH (MasterCard Alert To Control High-Risk Merchants).
In addition to excessive chargebacks, there are 13 other reasons why companies can end up on the MATCH list, including card laundering, identity theft, and illegal transactions; each reason has its own code in the MATCH system. The biggest implication of being placed on MATCH is that it becomes very difficult to find reasonably priced card processing services. Even high-risk processors generally shy away from processing with merchants on MATCH.
Many merchants are concerned that a MID shutdown and the resulting MATCH listing will affect their personal credit rating; one bright spot among the consequences is that your personal rating is safe. (Obviously, your credit could be affected if the processor decides to sue you, but a MATCH listing per se has no direct effect on your personal credit.)
The next question is whether your processor will attempt to impose a fee when it closes your account. These fees are called early termination fees or ETFs. Your contract will set forth what ETF the processor can impose. Traditionally such fees would be in the range of $300 or less; However, some processors have inserted clauses into their contracts with merchants that result in astronomical fees for early termination including fees that exceed what the merchant would have paid the processor had the relationship continued.
Although many of these provisions are deemed unenforceable due to being considered “penalties”, processors are aware that few if any merchants will ever attempt to challenge the assessments. They know it usually is not worth it for the merchants to bring a suit to recover the funds.
And when your Merchant ID is terminated, don’t be surprised to find the processor refusing to pay you your reserve and whatever revenue is in the processing pipeline. The industry refers to this as putting the merchant on a 100% reserve. This happens frequently and most processing contracts allow it. The question is when if ever, will the processor turn over these reserves. It can be 6 months, or even longer.
There is one last issue you need to be aware of if your Merchant ID is canceled: handling credits for refunds on purchases that are still in their guarantee or return period when the cancellation occurs.
This practice on its own is bad enough, but when combined with early termination fee clauses that are ambiguous, unenforceable or downright nonsensical, it can be lethal for the merchant – especially if they’re already grappling with the issues that caused the MID to be shut down in the first place.
As with many things in life, the solution to almost all of these problems is to remember that an ounce of prevention is worth a pound of cure.
Finally, some processors will also claim that a merchant’s actions have hurt their business, and say they’re holding on to payments as compensation for that damage – even though nothing in the contract allows them to do that.
There is one last issue you need to be aware of if your Merchant ID is canceled: handling credits for refunds on purchases that are still in their guarantee or return period when the cancellation occurs. This can be a huge headache for merchants with liberal returns policies, who let customers try products out and send them back if they don’t like them. Even if you manage to set up a new MID in time, your new contract will in all probability forbid paying out refunds for purchases made with a previous MID. That can leave you struggling with your processor as you attempt to honor your commitment to your customer.
As with many things in life, the solution to almost all of these problems is to remember that an ounce of prevention is worth a pound of cure. The time to think about what happens if your MID is terminated is when you’re signing the contract with your processor, not after the termination has already happened. Unfortunately, the presence of unscrupulous processors on the market makes it crucial to know exactly who you’re dealing with, and to make sure your rights are protected in any contract you sign.
Need legal assistance? Theodore Monroe can be reached via email Monroe@tfmlaw.com or via phone at 213.233.2273.
Theo Monroe is the principal and founder of TFM Law. His practice focuses on litigation and counseling in the payments, credit card processing, e-commerce, direct response marketing and Federal Trade Commission enforcement areas. Sample actions include representing merchants recovering funds from processors and drafting and negotiating contracts involving payment facilitators and ISOs. He can be reached via email Monroe@tfmlaw.com or via phone at 213.233.2273.