PayPal reserves. Surprise!
Posted on Thursday, August 13, 2009
I've wondered how PayPal seemingly signs up any merchant without doing any underwriting or risk assessment. Well, now I think I have my answer. They do it after the fact.
There is a lot of risk associated with providing credit card processing services to a business. If a merchant sells something that they can't deliver, don't deliver, partially deliver, deliver poorly, or that is defective in some way, and the business can't remedy the situation with their own financial resources, the credit card processor is on the hook for all the chargebacks and losses.
Merchant account providers can do a number of things to address these risks including a reserve requirement. Reserve requirements come in different shapes, sizes and flavors. Some are 6 month rolling reserves, some are fixed amounts, some require upfront money and others are collected as part of the processing volume.
When cash flow management is one of the most important components of running a business, a reserve requirement is probably something better identified before, rather than after, the fact.
