Insight on How Businesses Hit By COVID-19 Face Holdbacks from Payment Processors


July 15, 2020

With refunds and chargebacks on the rise, businesses are subject to 30-40% holdbacks by many payment processing companies. T1 Payments provides insight into why merchants are now being faced with such high holdbacks during the COVID-19 pandemic.

COVID-19 has had a catastrophic impact on the global economy, from worldwide travel restrictions to the mandated closures of much of the retail and hospitality industries. As a result, the number of cardholders demanding refunds and/or initiating chargebacks has skyrocketed. Without incoming revenue, many merchants have been unable to satisfy these financial obligations, and Payment Processors around the globe are left holding the bag.

According to a recent article from The Wall Street Journal services like PayPal and Square are amongst those hit the hardest: “Businesses that charge customers up front for goods and services they promise to deliver in the future are particularly at risk. Among PayPal’s merchants in travel and events, some companies recently were paying out more in refunds than they were taking in with new bookings,” PayPal Chief Financial Officer John Rainey stated at a May investor conference.

Payment processors are ultimately liable for three items: chargebacks, refunds, and interchange fees.

Chargebacks have long been a problem within merchant processing, but in recent months, these fees have been crippling businesses. “Those disputes, also known as chargebacks, accounted for 0.05% of credit-card transactions before the pandemic,” according to the research and consulting firm Mercator Advisory Group, whose statistics include fraudulent purchases as well. “Now, in certain categories, including travel, chargebacks are as high as 40%,” explains the article.

Interchange fees make up most of the fees paid by merchants to their payment processor. The processor must then pay these fees directly to the Card Brands, such as Visa and Mastercard. The Card Brands facilitate the process of the funds transfer from the acquiring bank to the card issuing bank each time a credit or debit card transaction is placed.

In simple terms, it is the cost associated with merchants being able to accept credit and debit cards.

It is common for payment processors to collect the previous months’ worth of interchange at the start of the next month via ACH from the merchant’s bank account. In recent months, when payment processors attempted to collect from merchants, what is typically a 2-3% rejection rate jumped to 50% or more because of lost revenue due to the COVID-19 pandemic. Payment processors were simply unable to collect enough from their merchants to cover the interchange fees owed to the card brands.

To add insult to injury, merchants had customers requesting refunds at an alarming rate. Many cardholders even bypassed the refund requests altogether and called their credit card issuers to start the chargeback process.

As a result, payment processors, such as Stripe and Square, were suddenly forced to take additional holdbacks and reserves from merchants. Lisa Kaye from T1 Payments sat down with us and explained, “merchants who have had it so good for so long now are being faced with such high holdbacks.”

“As if it wasn’t already a perfect storm, the supply chain and delivery of products the US was facing showed a complete breakdown of our country’s supply chain, as USPS, FedEx, and UPS were overloaded and prioritizing essential items,” said Lisa Kaye from T1 Payments. Out of sheer panic and fear, even more refunds were requested by cardholders because purchased items were not arriving within the time frame promised by the merchants.

“I had many years of low risk payment processing experience before moving into high risk. I never thought I would see low risk processors having to place such large holds, but at the end of the day risk is risk and it needs to be mitigated at all costs,” said Kaye.

“Merchants have always thought that the fees collected by payment processors are 100% profit and that is just not the case. Payment processors have to pay for a merchant’s interchange fees, chargebacks and refunds – all stated in their contracts,” further explained Kaye. “It’s important we continue communicating this to our merchants, so we avoid future misunderstandings.”

For more information about merchant payments and how payment processing impacts cardholders, merchants, and the general public, visit the T1 Payments website.

More about T1 Payments:
A partner in working to understand your complex business needs when it comes to merchant processing, T1 Payments, provides alternatives to traditional banking partners to allow for increased underwriting flexibility and business continuity. From merchants with advanced accounts and business structures, to low-risk and high-risk industry merchant processing needs, our underwriters are ready to listen to your unique business’s requirements to provide flexible and transparent solutions.

Our technology infrastructure has been built to scale with our high-growth clients’ and complex processing requirements. T1 Payments’ secure gateway and integrated shopping cart solutions are compliant with all Payment Card Industry Data Security Standards (PCI DSS).

T1 Payments offers unparalleled customer service and live support, so merchants have a business partner with experience and professionalism.

For more information, please visit https://t1payments.com/ or call 1-866-518-2216.

T1 Payments Press Release