Why Square’s Rolling Reserve is Bad for Small Businesses

Recently, New York Times and CNN issued a report that Square Payments has begun withholding as much as 30% of the money it collects from customers which has resulted in financial distress, complaints, as well as an online petition. This decision comes at a time where businesses have continued to experience financial constraints due to mandated closures and are looking into innovative ways to help bring in revenue.

Why is Square Withholding 30% of Merchant Payments During COVID?

In one of their blogs explaining the hold, Square admitted to forcing 30% of business transactions to be stored into a reserved balance as a way to protect the buyers and enable more merchants to process transactions on their Square Platforms.

Not only that, but the length of time in which they release these funds is 120 days after the transaction has been made. As a defense, they noted that this rolling reserves tactic is a “common industry tool” and that the function of the reserves being set aside for their set period time is “to protect you and Square from unexpected loss events.”

The factors they claimed to have used included, but were clearly not limited to:

  • Goods or services that may be more prone to receiving payment disputes
  • Length of time the merchant processed payments with Square

While they’re claiming that it’s to protect businesses owners against risky transactions and to ensure business accounts are not deactivated, many small businesses shared with New York Times that they’ve didn’t have a history of at-risk behaviors or known reasons for which they were suddenly liable for a risk hold.

Due to the timing and nature of these holds, decisions appear to have been made in response to current state events and the sudden need for Square Payments to protect itself.

Square’s lack of a thorough underwriting process in order to skip past the risk mitigation stage and onboard every merchant means they already work with multiple high-risk businesses, both intentionally and unintentionally.

The end result has meant pulling critical funds from low-risk businesses that are playing by the rules in order to balance and safeguard themselves against these high-risk merchants. Not only is it unfair to small businesses, but this risk mitigation strategy has also continued to prove itself detrimental to the health of businesses already under pressure to rapidly adapt to a new norm.

What is a Rolling Reserve?

The concept of reserves isn’t new, with other merchant services providers including PayPal being known to impose rolling reserves on occasion, much to the frustration of small businesses relying on their payment processing services.

A rolling reserve is a risk management process in which the merchant services company reserves a portion of a transaction into a special reserve to help cover unexpected risk costs such as disputes, refunds, outstanding fees, or any additional fees. These funds are then released after a set period of time as determined by the provider.

How Does it Work?

Dependent on the risk assessed during the process, the amount held in the account is supposed to help create a buffer in managing that risk and serve as an added financial resource and tool to help the businesses counter any risk costs and losses. How a merchant services company like Square defines risk is at the discretion of the provider on how they define a risk, including how they account for measurements that need to be taken.

The addition of a rolling reserve, or identification of risk holds, typically occurs during the underwriting process. As a result, negotiations and discussions about if a small business needs a risk reserve or hold are out of the hands of the sales representative. This is especially true when one is suddenly imposed.

Normally, reserve accounts set aside around 5-10% of a business owner’s credit card transactions. This means Square’s 30% hold is 3-6 times the industry average.

Here is a simulated scenario comparing a possible 10% hold per transaction and Square’s 30% hold for a business processing $15,000 per Month for 120 Days.

10 sales per day x $50 per sale x 120 days = $60,000

10% Reserve Hold Square’s 30% Rolling Reserve Hold
Cost of Processing*: $1,436 Cost of Processing: $1,620
Reserved: $6,000 Reserved: $18,000

* For this example, we averaged a number of common interchange rates and applied 1.65% for card-present transactions and 2.15% for card-not-present purchases.

An even greater challenge is when the merchant services provider does not have a dedicated underwriting team with whom the merchant can quickly communicate to resolve any sudden risk issues. That means business owners are now left unprepared and with their hands tied on and are left unable to quickly get back the funds they need to run their business.

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Related Post: What Square Payments New Pricing Means for Your Small Business

Why is Underwriting So Important in Merchant Services?

The percentages and hold timelines are under the jurisdiction of the payment processor. This is bad news for businesses when choosing a payment processor that does not have an established underwriting process to ensure that the need for a risk hold makes good sense for your small business. As a result, many merchant services providers use any means necessary as a way to mitigate their own risks after they get you through the door.

While it is easier and quicker for any merchant to open up an account with payment processors such as Square, risks are not reviewed in advance, and measures are determined at the moment and at the direct cost to the small business.

Now more than ever it is important for businesses to work with a merchant services company that has your company’s best interest in mind and can help mitigate future risk through an efficient, streamlined underwriting process. Here is what it should look like:

  1. When you sign up for a new merchant services account, your provider will typically ask what your average ticket size is, as well as your highest possible ticket size.
  2. Your account will then be approved by the underwriters for a certain amount of money per transaction based on your business type, processing history, and ticket size.
  3. If you process sales that are outside of that approved range, the underwriters will issue a risk hold. This means the funds from the transaction are held until proper documentation can be provided for the sale.
  4. Once the sale is confirmed, the funds are released and your merchant services provider will work to re-establish your maximum ticket size with the risk department if necessary in order to avoid a repeat occurrence.

Ultimately, as a business, you deserve to have the information upfront so that you can make an informed decision on working with a merchant services provider way before any of your hard-earned dollars pass through the processing system – not arbitrarily after the fact or in the middle of a crisis.

Here at Stax, our combination of leading technology, award-winning Business Success Team, and money-saving subscription model works hand in hand with the needs of your business today to ensure you are paid quickly and easily.

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