Why Is There Risk Involved With Merchant Accounts?

By Taquee Hicks

It is important to know that any bank or ISO that offers merchant services to merchants assumes the risk of financial losses. A merchant account is in essence an unsecured credit line.

Here's an example: A customer orders a $1,000 table, which will not be delivered for two weeks, from a furniture store and pays with his credit card. U.S. Merchant Systems processes the $1,000 transaction and deposits the funds into the merchant's bank account within 2 business days. Two weeks pass and the cardholder finds that the furniture store has gone out of business without delivering the table. The cardholder calls his Issuer to initiate a chargeback on the grounds that the merchandise was never received.

Visa and MasterCard rules state that in the event of an Issuer initiating a chargeback, the Acquirer is immediately required to return the $1,000 to the Issuer to be placed back on the cardholder's card. The Acquirer will now have to collect the $1,000 from the merchant. As the merchant is no longer in business and chances are that there are not enough funds in the bank account to cover the chargeback of $1,000, the financial responsibility lies with the ISO/MSP.

There may be more than $100,000 worth of orders taken that were not delivered to customers - all subject to legitimate chargebacks. Since these funds MUST be returned to the cardholders and the merchant cannot cover this amount, the entity that underwrote the merchant account (i.e. bank or ISO/MSP) will have to assume the liability, taking a $100,000 loss in the process. As you can see, a merchant account is similar to an unsecured credit line with risk of fraud, non-delivery and non-payment of charge backs.