PEP Episode 010 — Understanding Reserve Funds in Payments with Bryce & James
- September 13, 2023
Reserve funds, high risk merchant, MPA. Do these words mean anything to you? Maybe you’ve heard it in passing, but don’t know exactly the meaning or would like to know. In this episode, Senior Attorney Associate Bryce Van De Moere joined with Managing Partner James Huber, discuss the importance of what a reserve fund is and how Global Legal Law Firm can help.
Jeremy Stock (00:00):
Welcome to the Payments Experts Podcast, a podcast of global legal law firm ISOs, FinTech, pay fax agents, merchants, processors, acquiring banks and card brands. If these terms mean something to you, this podcast is for you. If these terms aren’t so familiar, this podcast is even more for you. We hope you enjoy this episode of pep, the Payments Experts podcast. Welcome to this episode of the Payments Experts Podcast, a podcast of global legal law firm. Today we’re talking about reserve funds. We’ve got Senior Associate Attorney Bryce Vander Moore with us, as well as James Huber, Global Legal Managing partner. Gentlemen, welcome.
James Huber (00:46):
Hi Bryce. Let’s talk about reserves. What do you deal with most with reserve funds? Because we have an interesting practice where we represent a lot of times both sides represent the ISO or the processor holding the funds. And then a lot of times we represent the merchant who’s going, give me my money back. But why don’t we start with what a reserve fund is?
Bryce Van De Moere (01:07):
Okay. Well, first off, I want to stay the disclaimer. You’re all watching a different podcast. I realize I’m wearing the same shirt as I wore in our podcast on the match list. So this is a different podcast anyway, but primarily the biggest issue that we run into in these cases is that when the client comes to us, they’re like, Hey, they’re holding us money. And I’m like, okay, can we get a copy of your MPA, your merchant processing agreement? And they’re just 80% of the time they’re like, what’s that? And I’m like, it is clear that the M P A is the most important document that you’re going to have. It dictates the terms of the relationship with the processor and the bank. It has all your rights, all your obligations, and more importantly all their duties and obligations. So evidently it’s not being communicated to these merchants that they really need to pay attention to this document. And secondly, there are literally thousands of processors of merchants out there or banks, processors of banks that are available out there you don’t have, and they’re all going to see you differently. So if you get terms that you just don’t like, you can shop, you don’t have to accept what you’re given.
James Huber (02:12):
And most merchants, I mean generally, I mean most contracts these days, you don’t even get the terms and conditions. It’s in a hyperlink contract. And oftentimes they don’t even hyperlink it. I mean, we have a case right now where we’re pretty sure they changed the hyperlink, they changed what was on the other end of it. So yes, it is important to get this document and read it because a lot of the documents say, Hey, we’re going to take a big reserve and it’s ours. You’re not getting it back.
Bryce Van De Moere (02:41):
And they’re like, why? How could you do that? Well, they’re like, well, look at the MPA. Well, I don’t have a copy of the MPA, so they can basically just do whatever they want.
James Huber (02:48):
But why don’t we take even step further back. What is a reserve fund?
Bryce Van De Moere (02:53):
Okay, A reserve fund is something that, well, the processor or the bank will designate you as a high risk merchant, and that is something that you need to clarify with them from the get go vis-a-vis how they view you. And if they view you as a high risk, then they’re going to want to set up a reserve account. You have your merchant account where all the money that you make from the processing that or the transactions that you submit for processing goes into the merchant account, but they will then decide to scrape off a certain percentage of all the processing that you do, and they will put that money into a separate account called reserve account. And usually it’ll be dictated in the MPA, it’ll be a certain percentage, it’ll be capped at a certain amount and they’ll just hold it. But they very rarely actually stick to the percentage that they take or the cap because sometimes, I mean, we have clients that come into us with reserve funds of $450,000. I mean, and their average ticket price is a hundred bucks. Now your average ticket price is the average sale that you’re submitting to the processor. So why you would need to hold $450,000 when your average chargeback is going to be a hundred bucks? I mean, it’s not logical, it’s not rational.
James Huber (04:12):
Well, I’ve seen it. I mean I’ve seen it on the other end. I think that you’re dealing a lot with more of the merchants. I’m dealing more with the processors going, well, wait a minute, you are selling online skin cream and you are cranking out a half million dollars in orders every month. What if your whoever’s filling up the skin cream doesn’t do it? And I have half a million dollars in chargeback. I mean, the reserve has a purpose. It’s to insulate the processor and the bank from risk. I mean, we all know banks don’t take losses. They just don’t. Apparently now
Bryce Van De Moere (04:54):
The government will bail amount,
James Huber (04:55):
Right? Then the government will come bail amount, but not on these chargebacks. So they’re saying, no, I’m going to keep this amount of money as a reserve to cover. What if you’re not fulfilling your orders? I mean, it is. It’s typically for high risk merchants, but any online merchant generally is a little bit high risk because I’m not getting this pair of sunglasses in my hand so I can do a chargeback. And the chargeback rules are skewed way in favor of the card holder. You can charge back anything anytime. I mean, you can walk into a store and do a chargeback. One of our favorite cases is we were representing American Express actually. And somebody went on a European vacation and rang up $88,000. There were videotapes of him going into these hotels all over Eastern Europe. And he still was going, no, that’s not me.
And it went all the way to an arbitration because they’re going, well, no, the rules say I get to charge this back. It wasn’t me. And it was so skewed in that person’s favor. So when you’re a processor and you’ve got a merchant cranking things out and there’s issues with supply chain fulfillment or maybe your skin cream is just jelly, there’s a risk of loss that they’re not going to take. And so I’ll see ’em be big flat fee amounts like, Hey, you want to come on board? Alright, you got to put a hundred grand in an account, or I’ll see it 10% rolling volume. And then every three months we’ll release that. We’re not just collecting more and more money. They have to release it. And the card brand rules, which are the only rules that govern a reserve account, are pretty vague. They basically say it has to be reasonably related to your risk.
And there has to be some kind of formula that leads a lot of deference. But we’re on the merchant side, we’re going, this is unreasonable. I mean, that’s what you’re running into a lot of time. No, you can’t just hold this forever. And then we’ll see what some processors do. They’ll start taxing this thing going, oh, we have an A C H reject. And it’s like, well, stop trying to ACH my account. There’s no money in there. They’re like, wow, we got to keep trying making money off of it and they’ll just drain this account over time. So whenever you have an issue with the reserve, there are certain processors and ISOs out there, you better get on them quick because they’ll drain the thing.
Bryce Van De Moere (07:25):
But my counter to that is that the reserve fund doesn’t come into play until you’re terminated.
So you’re not processing anymore. You’re not selling anymore. And so since the standard reserve withholding period is about 120 days, I mean you’re going to know pretty much right after the merchant is terminated, whether or not there’s going to be a run on chargebacks on the product. So the visa rules say that the amount of the reserve has to be reasonable as compared to the amount of risk involved. And so when you go back and say that the ticket price is like a hundred bucks or 150 bucks, there’re going to know whether the customer is satisfied with the product or it’s garbage and they’re going to be charging back. So it just doesn’t make sense to me how risk could justify holding $480,000 for 540 days. I’ve seen reserve periods as high as that one. And our client in this case was really indignant about how could they do this? And then I looked at the agreement and it’s right there. They signed it. They
James Huber (08:39):
Signed it. You said they can hold
Bryce Van De Moere (08:40):
This. So it was clear that the merchant or the merchant representative had not read the agreement. And it’s then that we have to get involved. And that’s usually the biggest hurdle that we’ve helped to overcome is that they’ve agreed to this,
James Huber (08:55):
They’ve agreed to it, but it does not fly in the public opinion. When we’re advising our clients that are holding these reserves, and there’s one law firm in particular that’s made their mark, they love going after these reserve funds. They attack your bank relationship, they attack your sales agent, they attack everything just to create hell. And it can be effective sometimes, but when you get to most of these agreements have an arbitration agreement. When you get to an arbitration agreement, I mean one, by the time you get there, the time has elapsed and they’ve been going, oh look, we’ve been incurring all these costs and fees and we can withhold this thing. But I generally advise even our ISO processor clients of you can’t just hold onto this forever, but there are situations, let’s say it’s a bust out account where they make it look cool, everything’s going along, and then it’s fraud.
They’re doing that to get the processing, and then they’re charging it all back because they’re using, I mean, it’s hard to use that many stolen cards now, but there are running fake transactions. So there are scenarios, and then there are other scenarios where, look, the FTC loves going after these online nutraceutical merchants or selling timeshares where it’s going, no, I’m going to get an FTC subpoena and they’re going to come knock in and they’re going to say, why’d you give them money back to them? I mean, the FTC doesn’t really say that, but there are certain investigative agencies that will go, oh, good, you held on the money. Good boy. Go on your way. And if not, you don’t want them digging around in your books. You’re not a bank. And the ISOs and processors aren’t holding the money, but by most of the time, they’re the ones in control.
Eventually people keep looking at this and it could blow the lid on the whole operation and make it actually harder for online merchants to get processing. So it’s the interesting thing about the merchant processing industry is because it works well with very little regulation, because people need this, if you start putting all these rules in place, online businesses, a lot of ’em go away selling vitamins or whatever that people really like to buy. You won’t be able to do it online. You’re going to go to the vitamin store. Have you ever been in a vitamin store? Yeah. You have been in the vitamin store.
Bryce Van De Moere (11:33):
Yes, I have. And I’ve actually purchased stuff
James Huber (11:35):
In the vitamin store. You’re creatine. Yeah. Yeah.
Bryce Van De Moere (11:39):
No, but I guess the point is that I’m trying to make is that the terms of the agreements are negotiable and the merchant needs to be aware of what they’re signing before they do it. They need to know under what circumstance this money is going to be withheld, how much is going to be withheld and how long they can hold it afterward. I mean, like I said, the standard in the industry is about 180 days. Again, we’ve seen as high as 540. And actually we have one case right now where they’re like, oh yeah, we’re going to hold your money indefinitely. I don’t even know what that means.
James Huber (12:09):
And definitely no, I see that all the time and it will cripple your business. You’re going, okay, great. I’ve got processing. Who cares? I’ve got another processor over here. Well, guess what? Things happen and we’ll see processors holding the funds and they’re going, I need that money to fulfill refunds. Yeah, we had a big problem. I need to refund these customers. And then here come the chargebacks. And then there’s also things you’re going, who cares? I’m going gangbusters. I don’t care about the reserve 10%, whatever. That’s just cost of doing business. And I’ll get it back at some point. A lot of times when things start going down, that’s when you actually need this money and you need it quick. I mean, the standard is, I think you said 120 or 180 days. 180 days. Yeah, 180 days is standard. Negotiate it lower. Do every single ISO processor out there has a reserve addendum that they will negotiate with you?
Absolutely. If you put ’em to an it might not work, cap it at a fee. Say, okay, it can go up if my sales go up, but you need to be planning for this because of the business. You don’t see the money instantly. It’s not coming in. So it’s kind of like out of sight, out of mind you, if you’re a high risk merchant, they’re already charging exorbitant fees, so you’re like, oh, that’s just going into the fees. But guess what? When it comes down to it, you’re like, oh yeah, I need that. It doesn’t have to be $400,000. I need that $20,000 in reserve to hit these refunds or to put a down payment on my new product that I fulfilled because I have all these orders and it gets stuck there and it gets eaten up.
Jeremy Stock (13:49):
That’s exactly right. James, we take these calls all the time. What can global legal law firm do? What is our process? How do we help get these funds returned to our clients? Maybe on the merchant side?
James Huber (14:01):
Yeah, if we’re on the merchant side, I mean, we go at the processor and we say, Hey, this is unreasonable. First we have to do a conflicts check, of course. But then we say, no, this is unreasonable. This is too long. Speed it up. Release as much as you can right now. And a lot of times they don’t have the risk because we’ll go, no, look, the merchant’s bank account is still open. If you guys hit chargebacks, you just keep taking ’em
Bryce Van De Moere (14:29):
Or give the merchant the ability to refund instead of
James Huber (14:32):
Taking the chargeback, instead of taking the chargeback. But they don’t make as much money on the refunds, as much more money on the chargebacks. So you put that in their face, get it in writing and set it up. I mean, the nice thing is that we know all the players. We know all the people, and we’ve just disputed these, litigated these so many times that when a merchant comes our way, we’re going, we got this. We know exactly what to do. We’ll get you your money faster and more of it. And maybe if it is stuck because you are selling C B D gummies and you told ’em you weren’t, we’ll make sure that they’re not going to start popping that money. We don’t do these charges because you don’t need to. Let’s let the money sit. I mean, that’s really our tactic. I mean, well,
Bryce Van De Moere (15:28):
The example you gave where there’s fraud involved where the chargebacks are just out of control right out of the gate. I mean, that’s a separate issue. But the ones that I deal with predominantly are where the merchant was terminated two months ago and the reserve account just hasn’t even moved. There has not been a chargeback.
James Huber (15:47):
Right. Or two chargebacks
Bryce Van De Moere (15:49):
Or two chargebacks. And that’s where my issue with them comes in is why do you need to hold all this money? And what’s even worse is when you get to the end of the withholding period, they’re not just going to automatically say, Hey, by the way, we we’re going to give you this money back. You got to go ask for
James Huber (16:05):
It. You’ve got to go ask for it. And you don’t
Bryce Van De Moere (16:07):
Even know who to
James Huber (16:07):
Ask. And you think that your money is sitting there, but your money is not in a reserve fund for the benefit of Bryce. I mean it is, but it’s just co-mingled funds in a big account. Well, yeah. Who knows? Go get it.
Bryce Van De Moere (16:25):
I look at it as like a bank. That’s why they have, my money’s
James Huber (16:28):
Bryce Van De Moere (16:29):
The bank. Exactly. No, no kidding. I allowed this guy to get a mortgage. I use that money to do mortgages. I use that money to loan somebody a private loan. But no bank has every depositor’s money at
James Huber (16:44):
Hand all the time. Bank of Bryce’s mattress. Exactly.
Bryce Van De Moere (16:47):
James Huber (16:50):
Do we have anything else on the topic? I mean, the main takeaway you nailed it is negotiate your contract on the front end. If you are getting terminated or you’re leaving your processor or you feel stuck with your processor because of the reserve, get on it quick. Call us or the only other payment attorney that handles it.
Bryce Van De Moere (17:13):
I mean, study your M P a, become familiar with it. Stay in regular contact with your processor and you
James Huber (17:20):
Can negotiate a midstream. I mean, we’ll do that all the time. Hey, you like our account? It’s working out okay, because you can, I’ll go get another processor and I’ll put half of my volume over there and start trickling away because I got better terms. So it’s never too late.
Bryce Van De Moere (17:37):
You don’t have to, it’s
James Huber (17:38):
Never too early, I guess is actually
Bryce Van De Moere (17:41):
You don’t have to accept what you’re handed. You have options. You have choices. I don’t think merchants know that. Yeah,
James Huber (17:47):
And a lot of merchants actually, they’ll think like, oh, it was so hard to get processing. The sales agents used to be more robust. They’re just like everything. There’s consolidation. So there’s fewer brokers on the street helping these guys get processing. But I mean, we can happily refer people to 10 options that can get them processing and help them negotiate the terms. And part of the nice thing is, well, we represent both sides. We represent the processor and the merchant. We’ll make sure you guys get the most fair terms. Obviously we do some kind of conflict waiver
Bryce Van De Moere (18:23):
And we end up dealing with a lot of the same players. So there’s a familiarity there. And I think that we would actually be able to accomplish more than a merchant is going to be able to accomplish on their own. Because does, they’re just not even going to know who to contact.
James Huber (18:35):
Yeah, you’ve got to know who to call. There’s certain processors that love new each other, certain processes that love dealing with gambling. There’s certain processors for each type niche business and just relying on your sales agent, he’s only got three, four relationships because it’s too much to handle if he’s got 10. I mean, I think we know every single player in the place. So placing merchants, just making the referral because they’re a client and not taking a piece of the action, giving them the right relationship and someone to work with is huge. I mean, it’s everything. Your processor is, your neck where the blood’s flowing.
Jeremy Stock (19:17):
Sounds like a great opportunity for whether they’re merchants or whatever stage they’re at to have global legal law firm as their outside general counsel. And they can, whenever these types of issues come up, give us a call and get that advisement that they might need.
James Huber (19:32):
Alright. Anything to close, Bryce?
Bryce Van De Moere (19:34):
Just like I said, you have options. Don’t think that you don’t. And we are more than happy to look at the proposed merchant processing application and agreement and determine what areas are just a no go and they need to
James Huber (19:47):
Move on. Well, yeah, it’s one of those things. Read your agreement. I’m not reading it. Fine, I’ll read it. Don’t worry about
Bryce Van De Moere (19:54):
It. Exactly. Well, it needs to be done just to keep you out of this kind of trouble. Yeah, it is going
James Huber (19:59):
To happen. It gets bad. Alright.
Jeremy Stock (20:02):
Excellent. Thank you so much, gentlemen. You’ve been here today with Senior Associate Attorney Bryce Vander Moore, as well as managing partner of Global Legal Law Firm James Huber. Thank you for listening. This has been the Payments Expert Podcast, a podcast of Global Legal Law Firm. Thank you for listening to this episode of The Payments Experts Podcast. New episodes first and third Thursdays. If you’re interested in learning more about PEP and how Global Legal Law Firm may be able to assist you, please visit us at global legal law firm.com. To schedule a free consultation, give us a call at (888) 846-8901 or email us at email@example.com. And once again, thank you for listening.
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