7-4 Provider Recourse and Penalties

Provider Recourse and Merchant Account Penalties

The merchant processing Agreement (MPA) that you must sign to open a merchant account is a legal document that gives the processor tremendous power over you and your merchant processing abilities. In fact, the MPA gives the processor almost all of the power in the relationship. If you overstep any of the processor's boundaries there is a whole host of things that they can do to make your world very ugly.

Almost every business person has heard about at least one credit card processing nightmare, and you can bet that for every one you do hear about there are a thousand more that you haven't heard about. It's no secret that there is a general dislike among the business community for credit card processors, and most of this stems from these horror stories that travel through the business world like high school gossip. Truth be told, processors aren't the monsters that they are made out to be in the vast majority of these cases. Most of the time the processor is totally within the guidelines set forth in the MPA, and it is the merchant's fault for violating these regulations.

It is absolutely crucial to know what the boundaries and regulations are with your processor, and to take them very seriously. If you choose not to learn about and follow these rules, you open yourself up to one or more of the following actions from your processor described in grueling detail below. Just a word of advice, reading this entire guide will give you the knowledge needed to avoid all of the following actions by your processor.

Violation of processing limits, average tickets, and general misuse of merchant processing abilities are the most common reasons why processors are made to take one or more of the following actions against a merchant.

Held funds - When you sign a Merchant Processing Agreement (MPA) you are granting the processor full access to your business bank account so that they may electronically deposit your funds from credit card sales, and deduct any processing fees or chargebacks . You are also giving the processor full legal control over any funds that result from credit card sales.

If the processor feels that any one of your transactions have become a security risk, it is well within their legal power to hold a portion of, or all of your undeposited funds for a period of time that they see fit in order to investigate the transaction in question. This investigation can be (and is often) as long as 6 months. For many businesses this is a catastrophic event that the banks will show little compassion for. They are out to protect themselves, and they will not release funds until they are totally satisfied that everything is legitimate.

When funds are held by a processor it is also possible that the merchant account will also be terminated. This means that a business will not only be left with a debt from the held funds, but that they will no longer be able to accept credit cards. The negative cash flow resulting from this penalty is often enough to bankrupt many businesses that were ill-prepared to deal with such an incident. The most common reasons why a processor will hold a merchant's funds are:

- Processing in excess of the declared monthly volume
- Processing in excess of the declared average ticket amount
- Maintaining an excessive chargeback ratio
- Using the merchant account to sell products or services that were not declared on the original merchant account application
- Using the merchant account to sell products or services that are declared unacceptable by the processor

Terminated account - A credit card processor can terminate your merchant account at any time with or without prior notice to you. More often than not, most merchants realize that their processor has closed their merchant account because they stop receiving electronic deposits from credit card sales, or their credit card terminal simply stops working and is unable to acquire an authorization. Although it is inconvenient to have your merchant account closed by a processor, is the most lenient recourse a processor will take against any misuse. Not all account closure are permanent. Some processors will just suspend a merchant account if the violation is not too severe. The most common reasons why a processor will close a merchant account, either permanently or temporarily are:

- ACH rejects (does not usually result in a permanent closure)
- Processing in excess of the declared monthly volume (usually results in a permanent closure)
- Processing in excess of the declared average ticket amount (usually results in a permanent closure)
- Maintaining an excessive chargeback ratio (usually results in a permanent closure)
- Using the merchant account to sell products or services that were not declared on the original merchant account application (usually results in a permanent closure)
- Using the merchant account to sell products or services that are declared unacceptable by the processor (usually results in a permanent closure)

Terminated Merchant File (TMF) - The terminated merchant file is a database of merchants that have had their merchant accounts closed for one reason or another that is maintained and accessed by all credit card processors. Usually only gross violations of merchant processing privileges will land you a place on the terminated merchant file, but once you are on it you will have a very difficult time getting another merchant account. A processor can place your name and details on the TMF for any of the reasons listed above, but they will usually only use this tool for gross or blatant misuse of an account. Before any merchant account is approved the processor will check to make sure that the merchant does not appear on the terminated merchant file. If you are added to the TMF, the only entity that can remove your name is the processor that originally added you to the file. In most cases you will need to settle the situation with the processor, and have your name removed from the list before you will be able to process credit cards through any other processor.

Fines - Most processor have a whole host of fines that they can hit you with for violating the merchant processing agreement. However, the most dangerous fines will come directly from VISA and MasterCard for failing to observe proper security measures, or for improper handling of card-holder information. Mail order and Internet business should be especially weary of these fines, and all businesses should make sure that they are handling card-holder information properly and securely. It is not necessary to list all of the fines that you could possibly get hit with, but most of them are in the thousands of dollars range and are per-instance fines. For example, if you violate a security standard 300 times that carries of fine of $1,000 because you are storing credit card data incorrectly, you will be subject to a total fine of $300,000 when and if VISA and MasterCard discover the violation. Fines are not pretty, and they can be easily avoided by learning about the regulations that do exist. The best place to start reading about this important information is at the Operations & Risk Management section of VISA's website.

Overage Charges - An overage charge is assessed to merchants that process over their declared monthly processing volume or limit. Not all processors have an overage charge, but the ones that do make out pretty well from the income it brings in. An overage charge is an additional percentage that is charged to balances in excess of the declared monthly processing limit. The overage percentage charge is usually 5% or higher, and it will dent your profits substantially. For example, if you declare a monthly processing limit of $5,000 and your actual processing volume is $8,000, the processor will charge you an overage percentage on $3,000. If the overage charge is 5%, as most are, the total overage charge for the month will be $150.

Criminal & Civil Charges - You would have to do something pretty bad to face criminal and/or civil charges for misusing a merchant account, but a processor can and will bring you to court or press criminal charges if they think it is necessary. Most people don't have to worry about facing criminal charges from a processor and/or the card associations (VISA & MasterCard). People that do need to worry about such things are usually well aware that how they are using their processing abilities is putting them at risk.

Civil action is something that most merchants don't think about, but it is a very real tool that processors can and do use. Merchant service providers and associated banks stand to lose money when a merchant account is misused. If the loss is substantial enough they will try to recoup some funds by coming after whom ever they can, and the first person in line is usually the processing merchant.

As we have said, civil and criminal charges do not usually result from the misuse of a merchant account because the violation is seldom severe enough, and/or is not pre-mediated to the point where a criminal or civil court would find fault. However, be aware that this is a possibility and the more you know about how to properly use your account and the regulations that govern it, the less you will have to worry about facing such recourse from your processor.

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