Credit Card Processing Co.'s Demand Cash Reserves; 5 Tips on Credit Card Processors

Responding to increased frequency of having to provide customer refunds after a merchant has gone out of business, credit card processors have been requiring some merchants to set aside a cash reserve. Some processors have gone so far as to hold back funds from approved transactions until the cash reserve requirement is met. With no shortage of reminders to watch the fine print in your credit card processing statement, here are 5 tips on credit card processing companies.

Business Week reported that due to increased commercial bankruptcies, at least two large credit card processors, First Data and Elavon, have demanded that some businesses maintain a cash reserve in order to continue accepting credit card payments. Most agreements between merchants and their processing company give the processing company the right to insist on a cash reserve. Some allow the processing company to withhold money from approved transactions until the reserve amount is met.

The problem credit card processors cite is being left holding the bag after a purchaser demands a refund but the merchant has already gone under. Normally, after a customer demands a refund, their credit card company gets it from the processor, who in turn takes it from the merchant's account.

The solution, however, has some businesses being forced to go without one to two months worth of transactions.

With another reason for small businesses to hawk-eye their credit card processing statements, here are 5 tips regarding credit card processors (culled from these 7 tips compiled for the hotel industry but applicable to all small businesses):

1. Understand your account statements. They are confusing and your account representative should walk you through their pricing and statements. If they won't or can't, think of switching processors.
2. Beware of hidden fees and charges. Find out what fees should be there, what they mean, and where exactly they go.
3. Know what rates are charged for different types of cards. The most widely quoted number is the basic "interchange rate" for processing a transaction. This is the rate charged on basic credit cards, however there are many type of cards, such as debit cards and reward cards. Knowing what types of cards a business' customers use most can help identify which processor has the best rates for that business.
4. Don't get expensive equipment leases. Buying the equipment saves money in the long term.
5. Upgrade your point of sale (POS) software. Lax security triggers an increasing variety of liabilities. As discussed in this blog entry, PIC DSS compliance is a contractual obligation on those accepting payments. If your credit card processor provides your POS software, make sure its security it up to current standards.

• Credit Card Processing: Eleven Pointers to Save Money, Part 1 (Practical Commerce)
• Credit Card Processing: Eleven Pointers to Save Money, Part 2 (Practical Commerce)
• The Nuts and Bolts of Credit Card Processing (AllBusiness.com)
• The Merchants' Bill of Rights (MerchantsBillofRights.com)
• Commercial Litigation Overview (provided by the Mandel Law Firm)