Merchant Account Gotcha

January 23, 2004

Merchant accounts are a necessary tool for doing business on the internet. By providing credit card companies with a secure place to hold your money for a while, to cover the risk of customer disputes, merchant accounts provide protection for the credit card company, you, and your customer. Given its purpose, it should not be seen as a savings account, but more like a line of credit. A line of credit has limits, and so merchant accounts limit the amount of money you can collect from your customers in a month. Grow too quickly, and your success can get you into trouble. None of this was explained to us when we started our business however, and we paid for it the moment we started making some real money.

Our Introduction to Merchant Accounts

We were provided an AuthorizeNet account as part of a package we purchased from storesonline.com. For over a year we had our account and were making a sale here and there, and watched as money got deposited into our checking account without any problem. Then bam! We did something right with our website and started converting customers like crazy. Before we knew what hit us, we collected $15,000 in a month, then $20,000 the following month, and $30,000 the next. It was pretty awesome, and we loved seeing those big fat deposits... until we realized that the $30,000 from that third month had not been deposited into our account... and we had about $20,000 in checks to write to our drop-ship suppliers! It was a Herculean effort to take the bits and pieces of credit we had on different credit cards, and pool them together into something large enough to write a check against. Frankly, we almost had to close our business. Why wasn't our money getting deposited?

A Rude Awakening

First, we called AuthorizeNet. That call revealed to us that our merchant account was not with AuthorizeNet per se. AuthorizeNet just provided our credit card processing capability. Once a credit card purchase was successfully "authorized", AuthorizeNet was depositing the money with a company called Concord Payment Systems. So, we called Concord, where we discovered that our account had a $10,000 limit on it. "A limit?" I asked. "Why limit the amount of money we could collect? Isn't the whole purpose for us to collect money?" The answer: chargebacks.

The Risk of Chargebacks

Something no one explained to us was that Concord was taking a risk every time they transferred money from our merchant account to our checking account. Apparently, there is a higher rate of successful credit card chargebacks on the internet than in brick-and-mortar stores (chargebacks occur when a customer convinces their credit card company that a charge was unauthorized, invalid, or that the merchant didn't deliver). As long as Concord is holding the money collected from a purchase, they can reimburse a credit card should a chargeback succeed. However, once they deposit the money in our checking account, that money is no longer available to them. If a chargeback occurs and it succeeds, the risk to Concord is that they won't be able to get us (the merchant) to honor it. The more money they are willing to hold for us, the bigger the risk when they make a deposit. Hence, a limit... and our's was $10,000 per month.

Resolution

We finally resolved the situation with Concord in the following manner: 1)Concord released all but $10,000 of our customer's purchases. The $10,000 was security for Concord against chargebacks. 2)We applied for an increase in our "credit" line to $30,000. They approved us for $20,000, because $30,000 was too big a jump in their mind. 3)The rep told us that should we "happen" to exceed the $20,000 limit in a month (which we consistently do during our peak season), we needn't worry. Should a rep notice us exceeding our limit, they would then also notice the $10,000 on retainer and would probably leave us alone. Thankfully, that turned out to be the case. What an ordeal! But, we were back in business again... with $10,000 of our money out of reach as the cost.

A Happy Ending

There is a happy ending to all of this. After about 6 months, we got back our $10,000 retainer fee after Concord realized that our business practices resulted in no successful chargebacks. Second, after six months had elapsed, we were granted another increase in credit, up to $30,000. Finally, we had learned a valuable lesson about merchant accounts, which we can now pass on to you, that you might be spared the same surprises!

© 2004 Abound Enterprises, All Rights Reserved.
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