PEP Episode 027 — Reclaiming Merchant Reserves & Understanding Chargebacks

Podcast Description:

Unlock the secrets to reclaiming your hard-earned money from reserve funds and chargebacks on this enlightening episode of the Payments Experts Podcast. Senior Associate Attorney Bryce Van De Moere and Managing Partner James Huber from Global Legal Law Firm join us to share their expert strategies for navigating the often murky waters of merchant accounts with payment processors like Stripe and Shopify. Learn how to identify unreasonable practices by comparing your average ticket price to the reserve amount and discover the legal avenues available to challenge excessive withholding.

Many merchants harbor misconceptions about reserve accounts, often to their detriment. We tackle these misunderstandings head-on, emphasizing the importance of negotiating terms to avoid being trapped in draconian contracts. Bryce and James shed light on the risk-averse nature of banks and payment processors, who frequently hold substantial reserve funds without a clear end in sight. This episode is a must-listen for any merchant looking to protect their financial interests by being proactive in their agreements with payment processors.

We also delve into the detrimental impact of unexpected fees and opaque reserve account practices, using a compelling case study involving Stripe Capital. Hear how one merchant was left in a precarious financial situation after being classified as high-risk despite initial success. The episode concludes with actionable insights on understanding merchant processing agreements and the crucial role of legal intervention in resolving disputes and reclaiming reserves. Equip yourself with the knowledge to safeguard your business and ensure your financial stability.

Podcast Transcription

Bryce Van De Moere (00:00):

We can get your reserve funds back in two ways. Either one, confirming for them that the time limit for the withholding has passed and that there’s no reason that they should be holding this money. Or we look at your average ticket price in comparison to the amount of money that they’re holding, which is what we were talking about before. If you’ve got an average ticket price of a hundred bucks, why do you need to build a reserve? It’s like 250,000 bucks,

James Huber (00:22):

Right? Yeah. The other thing that we attack on this is they know it has to be reasonable. Yeah.

Bryce Van De Moere (00:28):

Visa says that the reserve account has to be reasonable in comparison to the amount of risk perceived.

James Huber (00:33):

And so we attack it and we say this is unreasonable. And then we also know the business practice of eating this up. So as soon as they see our logo, they’re going to stop that because if they’re doing that, that’s where we go ballistic. Because a judge doesn’t want to see that. That doesn’t make sense. You’re ACH hing the account eight times a day. Why are you doing that? You could try it once a month or a couple times a month, but they have the ability to so they just do it

Bryce Van De Moere (00:59):

Well, and that’s also the dirty my opinion. That’s the dirty little secret behind these arbitration clauses. The arbitrations are confidential, right? So what they’re doing when you really dive down into the processing statements and shine a light on what they’re doing, it’s just like it’s a cockroach, but then they don’t want that getting out.

Jeremy Stock (01:21):

Welcome to the Payments Experts podcast, a podcast of global legal law firm. We hope you enjoyed this episode. Welcome to the Payments Experts Podcast, a podcast of global legal law firm. Today we have in studio joining us, senior associate attorney Bryce Van Moore, as well as managing partner of Global Legal Law Firm James Huber. The topic today, gentlemen, is Reserve Funds Stripe. Shopify. Jump right in.

James Huber (01:56):

Well, I walked by Bryce’s office the other day. We know that he was all riled up about Stripe, so I was going, all right, let’s go vent a little bit.

Bryce Van De Moere (02:06):

Yeah, this is basically a public service announcement for any merchant that deals with Stripe and is actually successful in dealing with Stripe. And evidently they found a way to take advantage of that. And so I felt like it was necessary for us to put the word out because we’ve seen this happen with this client, and now I guess we have at least another case with Shopify who, if you don’t know this, Shopify is actually backed by Stripe. It’s described as a white label service of Stripe. So while you’re signing up with Shopify, you’re really signing up with Stripe. And so this is, I don’t think many people know about this, and so it’s important that we get the word out.

James Huber (02:46):

Yeah. Well, let’s start. Let’s explain some of the base terms that we’re going to be using, reserve Fund, chargeback. Anything else? Can you give us just the high level dictionary of these terms and what they are, and then as we use them going about, people can rewind back and listen to ’em?

Bryce Van De Moere (03:09):

Absolutely. So when you sign up with an ISO or a bank, they will look at your business model and look at the good or service that you’re selling, and they will assign you a merchant code, also known as a mid, which is like a subset of whatever it is you’re offering. And they will determine whether or not you are high risk. And if you are high risk or they deem you to be high risk, they will institute a reserve account, which is basically, they’ll take a portion of your processing, your revenue, and they’ll move it over into a side account and it’ll just sit there in case you get chargebacks or fines or penalties, or you end up being busted for widespread fraud. And then they would go to your main account, your merchant account, and they would get the money to pay the chargeback or pay the fine or whatever.

Bryce Van De Moere (04:04):

If you don’t have that money in your merchant account, they would then turn to the reserve account for those funds. They don’t want to have to pay them on your behalf because somebody, the card brands, the MasterCard Visa mandate that somebody has to pay that back. And so they’re just going to take it from the bank and it is going to roll downhill, and the bank’s going to take it from the ISO, and then the ISO is going to have to go after the merchant for it. But one common misconception is that while the money’s going to the reserve account, they’re not going to touch that reserve account until you’re terminated. They’re going to continue to draw from your merchant account. So that money just sits there and very often there isn’t even a cap on it or there isn’t even a negotiated percentage they’re going to take, they just determine it themselves and they do it. Do you have the ability to negotiate? Sure, you do, but most merchants don’t do that or know that they can do that. They will take what’s given to them and they just want to go on processing. And this reserve fund and this high risk designation is where stripes, I guess, new scheme is coming from.

James Huber (05:12):

Well, the reasons that a lot of merchants don’t negotiate is they’re so happy to get processing. Exactly. So having some of the money go into a reserve account, they’re going, okay, whatever. I’ll get that money back eventually, you would hope. But we see this with not only Stripe, but other processors. They hold onto these, and as you said, it’s not just a set amount. Sometimes they say, yeah, you got to put 200 grand in reserve off the get go. Usually it’s a rolling reserve, 10% of your processing revenue. And I do see situations where they do give some back, and you’re not seeing that with Stripe right now, but usually it’s a rolling reserve. But you have merchants who are ramping up, ramping up that 10% of your volume. It gets huge. And sure they’re releasing some of the other money, but they’re collecting way more than they’re releasing.

James Huber (06:07):

And then a lot of times we’ll see them collect, collect, collect, collect, cut it off, and then they’ll take that reserve and they’ll dig away at it by things of like, oh, we keep going into your account and there’s no money there. It was like, well, yeah, there’s no money there because you took it all. And then they’ll try and they’ll go, oh, a CH reject fee, a CH reject fee, and we’re charging you $25 for each A CH reject, but our cost is only $2. So they’ll hit that eight times a day every day and just eat up your reserve account. They have all these things and we’ll see them basically take your reserve account. So you’re right. When you are getting into a processing relationship, it seems great. You’re so happy you’re live. You’ve got to negotiate these terms with the processors and even Stripe because they will negotiate them. And if you don’t try to negotiate ’em with them, it hurts your ability to sue them. So to sue them for an unconscionable contract, you have to try to negotiate it. And that can get you around the arbitration clause, and it might not get around the arbitration clause, but it can get you to a place where you’re actually challenging their business practice and not just your dispute. You’re going, the whole operation is messed up

Bryce Van De Moere (07:29):

In the event that it goes to litigation. You need to show that you at least made an effort to

James Huber (07:35):

Negotiate. Right? And Stripe, of course, they’re going to say no, but they might negotiate reserve terms.

Bryce Van De Moere (07:41):

But you requested,

James Huber (07:41):

But you requested and you go, Hey, I just wanted this one term. I mean, these contracts, these are varied draconian contracts. And look, I mean most contracts are, unless you negotiate them,

Bryce Van De Moere (07:52):

Well, you’re dealing with a bank, which is as risk averse as it gets. And Stripe is nuclear about risk, risk aversion. So they’re merchant prostate agreements, which we refer to in the industry as MPAs. Yeah, they’re so onerous and against the merchant. I mean, it’s just, and back to your comment about the reserve funds, it’s just you need to know, you can negotiate, okay, you can take this percentage of my revenue to build a reserve account. You can build a reserve account to a set amount and then stop. But as Jeremy will attest on these reserve fund release cases that we get, these merchants come to us with banks holding hundreds of thousands of dollars in their reserve accounts, and they have an average ticket price, which is an average sale, and therefore an average chargeback like a hundred bucks. And it’s like, what do you guys think is going to happen? I mean, there’s going to be this huge run on the a hundred dollars chargebacks and it’s going to eat up this 200, 300, $400,000 that you’re now holding for what, 270 days or even as much as 540 days, which is, I know the merchants aren’t aware of that because they’re not looking at the downside, and I understand why they just want to get going, making money. They’re not interested in the details, but they need to be. And that’s where you need an attorney to look at this stuff.

James Huber (09:16):

And the difference is you’re going, okay, well, a bank is holding my money. That’s what banks do. You know what they’re doing. They’re going loading it all over with the reserve account. They’re not supposed to, that money is actually supposed to be there. Now, it all goes to one bank account, but the ledger is supposed to say, Bryce’s 10 bucks is right here, sell D four. And the truth is, that generally doesn’t happen. They actually, yes, do go. Either they play with it or they show it on their balance sheet for this, that or the other thing. And like you said, they don’t want any risk of loss. And like I said, they eat it up and they take it for fees. So for everybody, having a huge amount of money in your account, even if it’s not yours, is generally good, unless of course you’re an attorney and it’s your trust account, which is just a headache to have sitting there. But

Bryce Van De Moere (10:10):

Plus they get all the interest on the account. Don’t the

James Huber (10:13):

Merchants, they’re not supposed to charge interest on the reserve account, but

Bryce Van De Moere (10:15):

The MPA says anything on that money is theirs.

James Huber (10:19):

Is theirs, even if whatever slush they do with it. Okay, so what specifically is Stripe doing these days?

Bryce Van De Moere (10:24):

Okay, well, we had a client come to us and he runs a event ticket service. And his model is actually pretty brilliant in that he only accepts payment by Zelle, so he doesn’t have to deal with chargebacks at all in a ticket environment. You get the ticket, go to the event, and you charge back the entire thing. It’s the same old scam. Well, Stripe is evident, and I haven’t really researched how long they’ve had this, but they had an issue with a new wing of Stripe called Stripe Capital. And so Stripe, he was with Stripe, he was processing, it was great. Stripe even actually sent him emails congratulating him about how well things were going and how profitable he was. And they then had Stripe Capital contact him and say, Hey, we noticed that you’re doing really well. We can offer a loan per the merchant. The terms were great. They negotiated that they were going to give him the loan and they were going to charge him 35% of his revenue to pay the loan back. Fine. Well, then about a couple of weeks later, Stripe contacts him and says, Hey, we’ve now determined that you’re high risk, which is evidently something they couldn’t figure out before the head Stripe capital hit ’em up. So now we’re going to take 35, we’re going to build a reserve of 35%, and it’s negotiable. So now Stripe was taking 65% of his revenue

James Huber (11:58):

And he’s locked. He couldn’t cancel Stripe. He’s got the Stripe capital loan. The terms are probably, you have to stay in bed with us.

Bryce Van De Moere (12:05):

Exactly. And typical Stripe, you never get the same person. No one person is ever assigned to your case. They don’t put any names on their emails. It is just like you don’t even know who you’re talking to. And it is the same conversation over and over and over again. And so yeah, they’re taking 65% of his monthly revenue and he’s complaining to them because his business is now in jeopardy.

James Huber (12:28):

How can you survive? He make business margin as a 65% profit.

Bryce Van De Moere (12:32):

Exactly. He can’t even make payroll. So I get involved, and first off, they just straight out ignore me. They won’t even talk to me. I’m like, give me the legal, I don’t want to deal with the complaints department. And they’re just not hearing me at all. They’re just being, I think it’s just intentionally obtuse about it. Well, of

James Huber (12:54):

Course.

Bryce Van De Moere (12:57):

But then they come back and they say to our client, we’re going to actually laterally impose a hundred percent reserve for the next 90 days, so you’re not going to get any revenue from for the next 90 days. And at the end of that 90 days, they terminate ’em.

James Huber (13:15):

Oh,

Bryce Van De Moere (13:18):

So it’s just like you, but we’re going to give you 14 days to find out the processor and we’re going to hold all your money, and you’re still on the hook with Stripe Capital. And so he’s with us and we’re making a bunch of noise, but at the end of the day, the guy still, his business is in jeopardy, and it could fold any month. And I mean, I made it clear, it is obvious. The way I first approach this is, well, obviously Stripe Capital and Stripe are not communicating. They’re two separate subsidiaries or entities. And so maybe it is just a miscommunication. We’ll know. Stripe Capital directly refers to the Stripe Services agreement within its terms and conditions. So they know what they’re in communication, they know what they’re doing. Stripe Capital has reached out to him because he’s complained so much about the situation, and supposedly they’re going to work with him on it, but they’re slow as molasses, and they’re very vague about what that’s going to be. I seriously doubt they’re, they’re going to reduce the amount that he has to pay, just not how banks work. And so now, like I said, we have another client coming in and Shopify is now doing the same thing. Doing the

James Huber (14:32):

Same thing,

Bryce Van De Moere (14:32):

Exact same

James Huber (14:33):

Thing. So the only way around this is you have to negotiate these agreements because great, we’ll go sue them and they will slam their contract down on the table and say every single thing that we did is justified by the agreement. And it’s hard to get around. I mean, some judges, they’ll see it and they’ll go, okay, yeah, this is a unfair deceptive business practice of how you guys even have these agreements. Other judges will go, the contracts, the contracts, contracts by their nature are unfair. That’s why you negotiate them. You didn’t negotiate it, you just signed it and you’re running whatever. This guy, luckily his business is, I don’t want to say a scalper is totally,

Bryce Van De Moere (15:19):

It’s like a StubHub,

James Huber (15:21):

But there’s other merchants that will go in and when they go to Sue, they’re going, well, what you are doing is quasi, I don’t want to say illegal, but it’s not totally legitimate business. So then they come into court and they’re going, well, this is an unfair business practice. And they’re going, well, what do you guys do for a living? But it’s fine. Everyone’s out there making money. And look, I buy my tickets off of those sites sometimes too. It’s fabulous. Not standing outside of the venue

Bryce Van De Moere (15:52):

Going, you can’t buy from the venue anymore. I mean, StubHub and Ticketmaster, they just swoop in and take ’em all

James Huber (15:57):

Electric. No, I just went to the sphere and people are standing outside being like, extra ticket. And I was like, the extra tickets, they’re use your phone.

Bryce Van De Moere (16:05):

What are you doing? Exactly. But in this instance, the guy was approved to sell event tickets, and if they were doing their job in the underwriting and the onboarding, they knew his business model. They knew how it worked, and they didn’t designate him as high risk. They only designated him high risk after Stripe Capital got their hooks into ’em. Well,

Speaker 4 (16:27):

Bryce, how many times have we seen that? Sorry to cut you off, James. How many times have we seen that? Right, where they’ll underwrite ’em, they evidently know exactly what the merchant’s up to, regardless of what field they’re in. And then one month later, six months later, six months later, they change their mind.

James Huber (16:42):

Well, Stripe square’s business model is that they don’t check on the way in. They get you up and they’ll terminate you three months later. But the red flag that you’ll always is don’t keep going is if somebody puts you on a hundred percent reserve, stop processing, you’re not coming off, it’s not going to get better from there.

Bryce Van De Moere (17:03):

Stop processing and cut off their access to the

James Huber (17:05):

Account. Cut off their access. Get all the money out of there, get a new processor. Even if your system goes down, you’re probably better off. You’re not getting the money anymore. And I get it, you need to keep your website up and running, but fine. Know that it’s not going to get better. Get a contingency plan,

Bryce Van De Moere (17:22):

And hopefully you can get a new processor before they figure out what you’re up to. And then they just match list to you just because they can.

James Huber (17:30):

I would say anytime you’re in a situation, look, if you’ve got a little reserve and maybe the processor and you’ve spoken to them, great. But if it starts going up, that’s where it’s going. Time to process. Have something else set up and ready to go. No,

Bryce Van De Moere (17:48):

They just do it. They just

James Huber (17:49):

Do. It’s doing this great

Bryce Van De Moere (17:50):

For business starting now, and you can’t do a

James Huber (17:52):

Damn thing. I’m keeping it and sue me for it. And then, okay, we’ll sue you for it and they’ll give it back. But you had to pay us a bunch of money and fine, if it goes to trial, you get your attorney’s fees back, but it’s not worth it for anybody. Especially the way that we litigated is go flamethrower, burn everybody to the ground

Bryce Van De Moere (18:11):

And wouldn’t have any,

James Huber (18:12):

Give me my money back quick. And they do, but it’s an expensive couple months.

Bryce Van De Moere (18:19):

Well, and it’s a vicious cycle too, because we’re like, yeah, they’re not going to deal. They’re not willing to deal with us, so we need to sue. And the client’s looking at me, I just had all my revenue cut off. I don’t have any money. Well,

James Huber (18:31):

That’s part of the model too, I

Bryce Van De Moere (18:33):

Guess.

James Huber (18:33):

So that’s every villain in financial movies get all their money. You can’t afford to sue me now. And then here comes Attorney Remus coming in and he doesn’t stand a chance. So yeah, I mean, the idea is one, they’re taking a reserve when they’re taking a reserve. You should be putting one aside too. Cause you might have to go fight these guys for it.

Bryce Van De Moere (18:58):

And I guess the lesson here is don’t double dip. If somebody’s already responsible for your cashflow, do not go in deeper with them on a loan. Do not go deeper with them. I referred to it to Stripe, to their face. This is just some perverse loan sharking scheme

James Huber (19:18):

That you guys, right, there were other options to get a loan. And I’m sure people will think about that in the future, but that is good advice is yeah, don’t go. I mean, we used to do a bunch of merchant cash advance litigation where people are getting these short term, high interest loans for their business tied to their processing, and then they would come due and then they’d get another loan to pay off that loan. It’s going, okay, don’t stack it up.

Bryce Van De Moere (19:45):

And because I’ve seen this happen before, the terms and conditions of the primary loan say, you can’t go get another loan to pay this loan off. You can’t encumber yourself further before we’re paid off.

James Huber (19:57):

But look, I mean, everyone’s allowed to make mistakes in their business and then people shouldn’t be taking advantage of it. That’s the big thing. And so that’s where we come in and go, yeah, okay, we’ve all made humongous mistakes in our business. One’s probably me sitting down here today, but don’t take advantage of it. So

Bryce Van De Moere (20:19):

Yeah. One little side note. Cause you mentioned Square earlier or Square, I may have mentioned this in another podcast, but people need to be aware of the fact, cause we were not aware until Square’s attorneys called me. Square doesn’t have a bank of its own, it can’t place people on Match Square uses your bank that you identified to them. So if you’re getting matched or you’re getting money taken, it’s not square taking it. It’s your own bank. But your bank is not going to tell you. They’re not going to tell you they did it. They’re just going to sit there and wait for you to figure it out on your own.

James Huber (20:52):

Yeah. All right. Any closing thoughts?

Bryce Van De Moere (20:56):

Yeah, don’t double tip. And if it seems too good to be true in this case, it really

James Huber (21:02):

Is. And anytime you’re dealing with a faceless corporation, because look, there are plenty of good payment processors out there for high risk merchants that don’t engage in this. And James,

Bryce Van De Moere (21:15):

We can connect them with some. We are merchants all

James Huber (21:17):

The time. Absolutely. Well, when we get these merchants to come in, we’re like, I’m so sorry. Here. You can go talk to this person. We’ve actually worked with them for years and they’re good people.

Bryce Van De Moere (21:27):

They’ll treat you like an actual client, not a number. Right.

James Huber (21:30):

And they have technology and stuff. I mean, our clients, we used to be, we represent sales organizations. So the processor, they’re all called FinTech companies now. So they’ve got the solutions because they saw what Stripe and Square were doing. That was scary for them for a minute. And then they went, these guys are horrible.

Bryce Van De Moere (21:49):

Yeah, they are. And I guess the other thing is when we’re talking millions of dollars in processing to spend a grand or two having an attorney look over the terms of your merchant processing

James Huber (22:01):

Agreement, it boggles my mind. I mean,

Bryce Van De Moere (22:03):

We see them all the time, all forms, all terms. We can tell you, yeah, this is a bad deal. You don’t want to do this.

James Huber (22:11):

And if they say no to these terms, then they’re probably going to enforce them. When you go, if you’re a merchant, you’re working with one of the processors that we work with a lot. Their terms are pretty rough too. But if you call ’em on it, a lot of times they can change it. It takes some legwork because with the MPAs, there are upstream agreements where you actually have to get the bank to agree. But a lot of the processors will get pre-approval for stuff where they can move it. Because a lot of times the rules say you can’t change the MPA, but the good ones will say, Hey, we’re going to agree to range of limits. Things like we can’t steal reserve funds.

Bryce Van De Moere (23:00):

Yeah. I mean, we’re not talking a major part of the agreement. We’re just talking about, okay, I’ll agree to letting you take this percentage for this long until you build a reserve amount of this much, and then we stop. And depending on how profitable the bank thinks you’re going to be, they’re going to work with you. They want your business.

James Huber (23:20):

I’ll add one last thing before we sign off, is the only rules that govern the reserve fund. Now there are banking rules, but they wouldn’t apply to how much they’re allowed to take are Visa and MasterCards. I say they’re rules because they’re just rules that Visa and MasterCard makes up and they enforce, but their rules, the only rules that touch this, say that the merchant reserve to be, guess what? Reasonable. It’s entirely reasonable for me to take all of their money for and put them in a loan. And so that’s one way that we’ll be attacking.

Bryce Van De Moere (23:58):

Yeah. Explain to me how that’s reasonable and total silence, total sounds.

Speaker 4 (24:03):

Gentlemen, I’m going to ask one thing of you. We do a lot of reserve fund work, Bryce, you’ve got your finger on it almost every single day. We do get reserve funds returned to our clients all the time. We don’t win every case, of course, but we do very often successfully get reserve funds returned to our clients. Can we talk quickly about how do we do that and why should people with reserve fund issues reach out to global legal law firm?

Bryce Van De Moere (24:29):

Because otherwise you’re going to end up in some customer service loop with some nine to five minimum wage person who has no authority, and we’re going to get you to legal. And they’re going to look at the contract and they’re going to be like, oh yeah, we have some exposure here. We’ve passed the deadline. We can get your reserve funds back in two ways. Either one, confirming for them that the time limit for the withholding has passed and that there’s no, what reason that they should beholding this money, or we look at your average ticket price in comparison to the amount of money that they’re holding, which is what we were talking about before. If you’ve got an average ticket price of a hundred bucks, why do you need to have to build a reserve? It’s like 250,000 bucks, right?

James Huber (25:10):

Yeah. The other thing that we attack on this is they know it has to be reasonable. Yeah.

Bryce Van De Moere (25:15):

Visa says that the reserve account has to be reasonable in comparison to the amount of risk perceived.

James Huber (25:20):

So we attack it and we’re saying this is unreasonable. And then we also know the business practice of eating this up. So as soon as they see our logo, they’re going to stop that. Because if they’re doing that, that’s where we go ballistic. Because a judge doesn’t want to see that. That doesn’t make sense. You’re aching the account eight times a day. Why are you doing that? You could try it once a month or a couple times a month, but they have the ability to, so they just do it.

Bryce Van De Moere (25:47):

Well, and that’s also my opinion. That’s the dirty little secret behind user arbitration clause because the arbitrations are confidential. Right? So what they’re doing when you really dive down into the processing statements and shine a light on what they’re doing, it’s just like it’s a cockroach, and they don’t want that getting out.

Jeremy Stock (26:07):

Thank you for listening to this episode of the Payments Experts Podcast, a podcast of global legal law firm. Visit us online today at global legal law firm.com.