While I've covered this topic before, it's very disconcerting to learn how many people receive overdraft notices and penalties, stemming from inadequate fund reserves in their designated merchant account bank. On a merchant account application, business folks must indicate where credit card processing funds will be deposited and deducted. Intuitively, merchants believe that the merchant bank account balance will grow and easily outpace processing-related costs. However, at any given time, the converse may be true and financial penalties may consequently result.
Small business merchants are even more vulnerable to being hit with NSF bank fees -- both from the processor and bank. Many only accept credit cards sporadically and the resulting funds may not be meaningful. A large credit card processing-related expense may tip the scales and lead to a negative balance.
Even business folks who have a large volume of transactions per month may not realize that the merchant account bank balance is in the red ... before it's too late. Consider the scenario where a customer disputes a large transaction. The processor may initially deduct this sum of money directly from the merchant account bank, depleting fund reserves.
How a Merchant Account Bank Balance Can Go So Low?
A positive balance can quickly disappear under the following situations:
1) The processor charges a large, annual PCI compliance fee - Many merchants forget about the PCI compliance fee, automatically deducted from the account. Many are not prepared for this expense and only realize that there is a negative cash flow upon receiving an insufficient fund notice from the bank or performing reconciliation at the end of the month.
2) A customer orders equipment - A processor may directly deduct the account for such items. It's crucial to know how and when you're going to be billed.
3) A customer initiates a chargeback - Business folks may not have ample fees in the merchant account bank to cover a chargeback -- particularly one that involves a high dollar amount. Customers can dispute charges even six months after a transaction has transpired, and as mentioned before, many processors automatically deduct the funds from the account. (Processors may also refrain from withdrawing chargeback-related funds and just hold that sum of money against future batches.)
4) A large customer return percentage - There are merchants whose return rates are high, and funds that comprised the positive ledger will now be taken away. It's so important to be aware of the daily balance when there are so many fluctuations of money going in and out.
5) A customer forgets the miscellaneous processing costs - For example, many processors will charge $25 for each chargeback and $25 for an NSF penalty fee. These costs can add up and must be factored into the end balance.
6) Drawing upon the account - While some merchants separate the merchant account bank from other checking or savings sources, others will use the account for non-processing related expenses. Merchants who draw upon their merchant account bank for miscellaneous reasons must be even more detail-oriented when it comes to the daily balance.
7) Switching to another bank account or closing the account - Surprisingly, many merchants forget to notify the processor when they switch their bank account. If this is the case, new funds cannot be deposited nor can expenses be deducted. A resulting NSF fee will materialize. Also, if you close your merchant account, it's best to wait a couple of months before closing the merchant bank account, if possible, as the prior monthly processing fees may not have all been deducted; also, chargebacks may arise later.
Have Ample Funds in Your Merchant Account Bank at All Times
The only way to avoid NSF fees is to ensure that you have a healthy bank balance at all times. You should have at least several hundred dollars to cover just about any expense. At the very least, ensure that your balance well exceeds your highest ticket to cover against future chargebacks. There's no reason to see these three letters on any merchant account or bank statement: NSF.
