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February 23, 2010

What is a merchant account?


A merchant account is an account that allows a merchant to accept debit or credit card payments. Unlike a regular bank account, you cannot withdraw or deposit funds into a merchant account. It provides two basic functions:

  • It acts as a basket where funds accumulate before being transferred into a merchant’s business bank account.
  • It transfers some of the chargeback risk from the merchant to the underwriting bank.

This second function is the core element of the payment process for a merchant.

What is chargeback risk?

Chargeback risk is not related to financial charges or credits. Instead, it refers to a dispute over a charge that has shown up on a customer’s credit card statement.

In using credit cards, customers may be paying with money that they don’t have. When the underwriting bank transfers money to the merchant’s business bank account, the underwriting bank takes on the risk that the customer won’t pay. This risk is called chargeback risk.

An example of chargeback risk

Here’s an example of how chargeback works.

  1. A customer calls the credit card association and refuses a charge. This call must occur within 180 days of the disputed charge.
  2. The credit card association sends the merchant a retrieval request asking for proof of sale. This usually consists of copies of the signed receipt.
  3. The credit card association considers the merchant’s proof of sale against the cardholder’s dispute and makes a judgment. If the credit card company finds the merchant correct, then the customer pays for the charge. If the credit card company finds the customer correct, then the merchant pays for the charge.

If the merchant cannot pay, then the underwriting bank must reconcile the charge. The risk of this occurring is called chargeback risk. To compensate for this risk, the underwriting bank charges a rate on the merchant account.

If you have questions about how chargeback risk affects your merchant account, contact a VersaPay relationship manager.

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This entry was posted on Tuesday, February 23rd, 2010 at 5:06 pm and is filed under Industry advice and tagged with chargeback risk, merchant account. So far, there’s been 2 comments.

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Comments about this story

How is it possible that I can get 2 chargebacks in one month, where the customer has entered their pin number, and I as a merchant am the one that has to pay the $25 chargeback fee, + fight the chargebacks when I have a receipt saying that a PIN was entered. Just how is that possible? I will fight this until I loose my hair and mind!!!!!!!

Camilla Perreault (April 8th, 2010, 10:29 PM)

Dear Camilla,

Thanks for writing in to us. I definitely empathize with your frustration.

Chargebacks can be inconvenient and aggravating for merchants and consumers, especially when you’re unaware or unfamiliar with the process. They’re really quite common with a number of business types.

Consumers generally chargeback an item in a couple of different scenarios. One scenario is if a credit or debit card is stolen, and fraudulent transactions take place on that consumer’s card. In that scenario, if you’ve obtained a signed sales receipt, their PIN was entered, and you’ve verified the signature or cardholder, then you are in the best possible position to win that chargeback dispute.

The second scenario where a consumer might issue a chargeback is if the item they’ve received or ordered was not received or was received but not as described. An example would be if a consumer ordered a green couch, and they received a blue desk chair, and the merchant had refused a refund. The consumer does have the right as a cardholder to chargeback that transaction.

Unfortunately for merchants, there is a chargeback processing fee if a chargeback is issued. In the future, the best way to avoid the chargeback is to ask for a piece of ID along with their credit card, validate the signature with what is on the back of the card, and ensure that if they are unhappy with the product or service you provide, to contact you to discuss a refund.

Feel free to get in touch with me if you have any further questions.

Andrew Russell
Senior Relationship Manager
VersaPay Corporation
888.318.8729

Andrew Russell (April 13th, 2010, 9:34 AM)

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