Are you a business owner? Do you use payment processing? Tell me, can you define payment indemnification? No? Then you’re leaving a lethal strike opening to your business, we’re talking straight to the proverbial jugular. The thing that many small business owners do not know, and the various invoicing and payment processing companies go out of their way to hide, is that you are offered zero protection or recourse in the event a client wants their money back.
Picture this – you work for months and many, many hours developing a project for a client. It goes live, they are happy, and you’re awaiting final payment. You wait… and wait…. and wait. Let’s say 30 days go by so you reach out requesting payment. Suddenly, the customer decides they just don’t want to pay you. They call their credit card company and chargeback to you. 2 days before all of your business bills are due, your saved funds disappear. They get their money and you now have to PROVE why they should give it back to you. You funds are stuck in limbo, they keep trying to withdrawl money from MULTIPLE of your accounts, even if they don’t have access. You learn this process can draw out for up to 540 days… and you watch your business go down the tubes.
Scary right? Well, I am living it that hell RIGHT NOW. I’m going to share my story, and above all else, how you can prevent this from happening to you.
The Payment Processing Conundrum
Those selling lower-priced physical products may already be familiar with the concept of chargebacks, though I’ll explain to be sure. When a customer wants their money back, and they paid with credit card, they can approach the credit card and request a return of funds. This can be done with or without your consent. It is assumed the customer is correct, and you must then lobby for your funds to be returned. They can request returns for a variety of reasons, and none of them have to be substantiated for your money to go poof. In fact, they usually take it before you’re even aware a chargeback exists.
Oh, think you didn’t give them permission? Well, you did. I’m going to use Freshbooks as an example. When you sign up, there are no terms and conditions you are pointed to or have to confirm. It’s written on their website that once you start using the service you automatically agree. Those terms defer all liability around your payments and chargebacks stating it’s handled by the 3rd party WePay. Of course, none of this is DISPLAYED while you sign up. You can sign up, confirm your email, and give them all of your information without any sort of formal consent.
Want to accept credit cards? Great! This is what you see! This is ALL of the information you are given. Does the information exist? SURE – they just don’t want you to see it. You’re sent an email, then directed to WePay to sign up. You see that little tiny checkbox? That’s your consent. You give it AS YOU CREATE THE ACCOUNT. Didn’t see it? Didn’t know? Too bad, that’s YOUR FAULT according to the existing system. You have now given them permission to hold your funds for up to 90 days in the event of a dispute – any and all I might add, under a trust account you’ve permitted them to setup.
20. Merchant’s Liability for Chargebacks
The amount of a payment may be charged back to you if (a) it is disputed by a Purchaser, (b) it is reversed for any reason, (c) it was not authorized or we have any reason to believe that the transaction was not authorized, or (d) it is unlawful, suspicious, or in violation of the terms of this Agreement. You are responsible for all chargebacks, whether or not the chargeback complies with the Operating Regulations.
Basically, You are liable for any chargebacks of payments you receive.
21. How WePay Handles Chargebacks
You owe us and will immediately pay us the amount of any chargeback and any associated fees, fines, or penalties assessed by the Bank, our processor or the Networks. If you do not have sufficient funds in your Account, we will have the remedies set forth in “Our Set-off and Collection Rights” below. If you have pending chargebacks, the Bank may delay payouts to you.
Further, if we reasonably believe that a chargeback is likely with respect to any transaction, the Bank may withhold the amount of the potential chargeback from payments otherwise due to you under this Agreement until such time that: (a) a chargeback is assessed due to a Purchaser’s complaint, in which case the Bank will retain and refund the funds; (b) the period of time under applicable law or regulation by which the Purchaser may dispute that the transaction has expired; or (c) we determine that a chargeback on the transaction will not occur.
If we determine that you are incurring an excessive amount of Chargebacks, WePay or the Bank may establish controls or conditions governing your Account, including without limitation, by (a) assessing additional fees, (b) creating a Reserve in an amount reasonably determined by us to cover anticipated chargebacks and related fees, (c) delaying payouts, and (d) terminating or suspending the Service or closing your Account.
You agree to assist us when requested, at your expense, to investigate any of your transactions processed through the Service. To that end, you permit us to share information about a chargeback with the Purchaser, the Purchaser’s financial institution, and your financial institution in order to investigate and/or mediate a chargeback. We will request necessary information from you to contest the chargeback. If the chargeback is contested successfully, we will release the reserved funds to you. If a chargeback dispute is not resolved in your favor by the Networks or issuing bank or you choose not to contest the chargeback, we may recover the chargeback amount and any associated fees as described in this Agreement. You acknowledge that your failure to assist us in a timely manner when investigating a transaction, including providing necessary documentation within seven (7) days of our request, may result in an irreversible chargeback. We reserve the right, upon notice to you, to charge a fee for mediating and/or investigating chargeback disputes.
**The above was taken directly from WePay’s terms of service. They make it clear, after you look for it, that you have no rights and no protection and you should be okay with that. DON’T BE.*
US vs THEM and Why THEY Usually Win
There are some out there that think, “Hey no worries, that’s the cost of doing business right?”. I disagree. It’s a broken system and I will explain why, using my least favorite invoicing system Freshbooks!
Freshbooks uses WePay and they have only a written communication system to discuss through. WePay speaks to the credit cards companies, again only through written correspondence. The credit card companies deal with the customer. The credit card companies make money through their clientele (card holders) and through the payment processing fees. You’ve already lost your fees to them, regardless. Therefore, they only really consider the consumer, the person whose revolving debt they don’t want to lose. WePay, they are this safe, happy middle man. They have no reason to invest in the small business owner’s case, because they ALSO make their money through the payment processing. Regardless, they have their money, so why do they care if you get yours? Now we’re back to Freshbooks and you’d think, hey, these folks are on OUR side, right? *Sign*
Well, how does Freshbooks make their money. In part you, in part processing fees. Therefore, like everyone else in this chain but you, part of their profits are protected. In fairness, the team has been making some effort to help us resolve it, however they claim that all they can do is forward messages between points. So, the only one who MAY care about you and your business has no ability to do anything about it.
I think you can see why, in most cases, they choose to return the funds to the consumer. If you deal in online retail, you may not even bat an eyelash at this. Here’s one adult novelty store owner that feels comfortable with the risk and willing to lose the money.
If you’re a service-based provider, with big bills and long projects, I hope you are shaking in your boots. $2k deposit could be returned at any time, even well in the future, and it’s on your to ensure you always have the funds to cover the chargebacks for months to come. If you don’t? You could be saying bye bye to your business.
How to Protect Your Business
I want to make it clear that I am still an advocate for running a small business. I still feel that, for some, accepting credit cards may be worth the risk. That being said, I also believe that you can never be too careful. Let’s talk about how you cover your assets.
Method One – Don’t Spend It
Most processors say they can, and will, pull funds from you for 90-120 days. Even reading through Visa’s conditions states as much. However there is nothing GOVERNING this, so they can do it whenever they want. If you truly want to avoid any possible mess, you’d need to hold the funds for 540 calendar days from the transaction processing date. That’s the absolute longest holding period I could find in their terms, so it’s your safe zone.
In WePay’s case, they returned an item that was paid for March 27th. That means legally, they should only have been able to process a return up to June 25th. This was a chargeback process without a reason code (so, you know, they aren’t bothering to disclose WHAT the reason is) 185 days after payment processing.
The safest method is to simply make money and hoard it for up to 2 years AND THEN you can start using it. Not very conducive to business, is it? Seems rather in favor of everyone making money except you.
Method Two – Use Direct Deposit or EFT only.
Can’t afford to site on your funds for more than a calendar year to protect yourself? Yeah, most can’t. That’s why many small businesses are turning to alternative solutions to collect their payments WITHOUT the involvement of credit cards and payment processing. If you can’t protect yourself in your ecisting system, find a new system.
EFT, electronic fund transfers, and direct bank deposits do not allow a return. The bank does not allow someone to simply come in and take money from your accounts. That’s why this is our new preferred method. We have recently found what looks to be a very promising service called Transferwise. It allows you to create “accounts” for anywhere you sell to in their own currency and country. They can deposit to your account even if you’re living somewhere else. Please, take a look, we’ve been very happy so far.
Method Three – Pray
If you’re one of the folks that does quantity over anything else, you may be able to get by hoping you’re never hit with a major flush of chargebacks. Though, it IS a prayer, to a deity that may not even exist. Let’s say you offer a novelty product that goes viral for being unsafe, etc. ALL of the people who purchased one put through a chargeback at the same time. It’s right before you place your next order. Now you’re out funds and out products indefinitely. Would your business survive?
If you said yes, all the prayer power to you. If you said no, consider one of the OTHER options.
What About My Customers?
Yes, people like convenience. Yes, you may get complaints if you stop accepting credits cards, and yes it may turn some people off from doing business. That’s why, despite my opinion, you still need to do what’s best for you and your customers.
I recommend you weigh what is more important – protecting your payments or making your shopping experience convenient? If you can afford the potential loss, convenience might be more valuable to you. If you can’t afford the loss, I highly recommend you take steps to truly protect yourself.
If you aren’t sure or you have any questions, please reach out to me. I’d be LION if I said this was fun to have to deal with and I would love the chance to save anyone else this hassle.