Stripe Is Holding 25% of Our Funds, Indefinitely
hackernoon.com
hackernoon.com
While I agree they need to protect themselves in reality 25% can amount to more then the margin on many products and so can put a company out of business if the company is struggling already. That said, this is a normal practice in the financial services industry regardless of provider. I have worked with 100's of ecommerce clients over the years and whenever their chargebacks/refunds started going up (for any reason), their credit card processors would always place a reserve on the transactions. It usually ranged from 10%-50%. Many times they could get it removed over time once their chargebacks/refunds dropped again, but you have to fight to do that every month.
What you are not explaining is why your chargebacks and refunds are up, Stripe's letter to you specifically mentions this, so they are trying to protect themselves. They also will have contractual obligations with card issuers/gateways etc that require them to do this if your chargeback rate exceeds some value. This isn't just you, this will happen to anyone.
Related by slightly different: I worked with a client who started getting dropped every 8 months or so from different major credit card processors. Their had a product & on-going service for senior citizens and their clients would forget they purchased the service (or their kids/grandkids would find it on a statement and get upset) and so then it would be reported as fraud or processed as a chargeback etc. Even though the company had voice recordings and proof the client themselves initiated the transactions the processors would drop them over time because their refund/chargeback rate would exceed 30% over time. This company is well known, not a scam and does a few million dollars every quarter in sales. So the way we helped solve it for them was to break their transactions across many providers and also move them into doing more ACH/bank transfers instead of credit cards. This is a common method to solve these issues.
> “Edwin from Stripe here. Holding funds is like a buffer for your balance—it makes sure there's enough money to cover any increase in refunds or disputes from customers. If there wasn't, customers may not get their money—and we only hold funds after we review a business and realize that it's at risk of this (like if disputes are growing).
Stripe doesn't gain anything or do anything with this buffer. We don't earn interest. It's reserved just for your customers. We regularly re-review the need for the reserve, then remove it at the earliest opportunity. (It's in our interest to! We hate refunds and disputes, which are expensive for us, and would rather see your cashflow to your business grow.)”
As for chargebacks, customers really win even if there are voice recordings etc? Or is it just too much hassle to go through the proof process for smaller transactions?
I wonder if they had to refund a lot of travel that wouldn't happen in 2020... and that's what triggered it. If I had a partner pull a rug out from under me, I'd focus on replacing them, especially if their reasoning is bullshit.
I think it should be the other way, those funds should earn interest, but that interest should go to the business after the waiting period.
If investors had the answer to that question, all of wall street would be out of a job.
There's always risk. It's just a question of whether or not offering that service brings in enough extra customers (or retains customers who may otherwise leave) to reasonably offset the risk.
We've also been experimenting with more dedicated support for bigger businesses: https://stripe.com/support-and-services.
Other than that 1:1 relationship between CS reps and customers should be the norm.
What do you do to explain that this might happen before they setup an account with Stripe?
Fighting chargebacks is a painful process for companies. Even with voice recordings where the consumer called in and requested the service and the transaction was confirmed through a secondary agent the company I was consulting for would lose a good percentage of the cases. I personally believe that is why the secondary confirmation agent (super common in the past) is rare now since companies found it was an expensive process and they still only won a small percentage of cases.
If you look at each transaction on its own it is almost always too much hassle to fight over (barring multi-thousands of dollars), but if you have hundreds of smaller transactions a month it adds up quickly. I know of one company in the home security monitoring business who decided to stop allowing credit cards and requires ACH now because of the chargeback issue. You can buy their products via credit card but not pay for their monthly monitoring service via credit card.
I find that hard to believe. Otherwise Stripe is leaving money on the table and I doubt their MBAs would allow that.
Quite possibly, yes.
This is where all the apparently reasonable arguments about payment processors holding reserves to protect against chargebacks break down. With most payment schemes, including cards, there is absolutely nothing that requires the decision-making process for a chargeback or similar claim to be fair or evidence-based. The organisations making the decision are not independent, they are typically the bank, card issuer or other payment service that wants to keep its customer happy.
Fortunately, my own businesses have extremely low chargeback rates, but of the few we've had over the years, it has been a 50/50 shot even in almost identical circumstances whether we'll win the dispute. That remains true even when we had a mountain of evidence showing that it was a legitimate charge and the customer themselves was happy to confirm that, for example if they'd had a card stolen and duly cancelled it, and their card company had then automatically charged back all the recent transactions, including genuine recurring subscription payments like ours. In all such cases, it cost us far more for the time to collect and submit the evidence than any money we got back even if we won the dispute, so we have since adopted a default policy of not even contesting chargebacks. For low-value transactions, it costs more to fight than to just take the punishment, which tells you how one-sided the system is.
If anyone here from Stripe or any other payment service wants to argue that the reserve scheme is reasonable and necessary to protect their business, I invite them to also push for chargeback disputes to be decided independently by neutral parties, and to publish statistics on card issuers or other customer-side payment services they encounter showing how often each is a source of disputes and how often any such disputes are ruled in their customer's favour. Then at least merchants would have some chance to protect themselves against potentially abusive actors within the industry by not accepting those payments in the first place if they wish.
If payment services like Stripe still saw unusually high rates of reversed transactions under those conditions and wanted to hold a reserve accordingly, at least it could then be done on a transparently reasonable basis, instead of based on arbitrary criteria and unilateral decision-making, inevitably prompting angry articles and subsequent discussions like this. And then since it would be transparently reasonable, the merchant-side payment services would have no reason not to publish statistics on any reserves they impose as well, allowing merchants to compare payment services and move away if the one they were using was unnecessarily aggressive in this area.
If Stripe needs a buffer to handle increased chargebacks, that needs to come from Stripe’s own revenue, not customers.
Imagine if an insurance company suddenly started retaining 25% of benefits owed because there was some event in the world (natural disaster, pandemic) leading to a much higher rate of claims.
It’s totally bogus for anyone to say that’s fair just because reality dealt a tough hand to that insurance company. It’s fundamentally their responsibility to remain solvent and fulfill benefits without externalizing higher premiums or holds or anything onto customers.
And actual insurance companies certainly don't expedite immediate payments when fraud alerts are set off.
If I’m paying Stripe for Radar, and there are needed chargebacks, it’s Stripe’s issue, not mine.
You know, I find that many businesses don't do one of the most simple things -- they fail to pay attention to how their transactions appear on the credit card statement line. A simple name and intuitive string + phone number instead of some unfamiliar company name "dba" can reduce the confusion by a lot.
Stripe, and all merchant processors, play in the financial world. They are doing risk mitigation in case your company can no longer fulfill these chargeback obligations as ultimately they would be on the hook.
I know you are mad at Stripe and understand why. They make it so easy to take payments, but we are in very interesting and different times right now. My industry has been identified as high risk and we have seen rolling holds like this and/or longer payout schedules. A different merchant processor would act the same if put in the similar situation of high chargebacks. The best you can hope for is finding a merchant processor willing to take on more risk for you.
Keep in mind that the processors are not going to be able to take on more risk than the card companies allow them to. You can not easily get around this in ways that are both feasible and legal at the same time.
One trick I know of was a company that ran a large number of low risk transactions (gas station payments) right along a much lower number of very high risk transactions. This 'blending' lowered the charge back rate to the point that their traffic was acceptable, but in order to get away with this they were mislabeling those purchases, pretending that the high risk payments were also gas purchases.
This is not acceptable to the card companies, they label this transaction laundering and will shut down any merchant account associated with such a scheme.
4) Personal guarantee 5) Up-front reserve
Were those transactions of a lot more money? Or about the same as the gas payments
Yet another variation on this scheme: deduct a single $ for charity from the purchase price: double the transaction fees, double the transactions, half the chargeback rate because people won't charge back a single $.
They're probably a payment aggregator with dynamic descriptors. This would allow them to process the high risk and gas correctly under the proper individual MCC but pool the transaction counts which would allow more chargebacks.
Source: Worked as dev at payment processor with dozens of acquirers, +10M transactions/yr, +$1B payments/yr.
To be clear, it just says there was an increase.
Edit: the company provides parking for people going on flights so it's very possible there was a substantial increase in refunds or chargebacks due to COVID.
The second way to look at it is that 25% sounds extremely generous as a first estimate. Over time it should be adjusted based on the actual risk, and likely this will happen, it is just that during a transition from 'low' to 'intermediate' or even 'high' risk Stripe has to play it safe and assume the future is going to be even worse given the slope that you are currently on.
So given the fact that Stripe is in the business of passing money on to you and that they are not seeing any gains from this rolling reserve it is in their interest to keep rolling reserves as high as they need but no higher. Otherwise their reputation would tank quickly.
It seems to me that you are not aware of how payment processors work behind the scenes and maybe are a bit overreacting to what makes good sense from Stripe's point of view, and which in the end only serves to protect your customers. Given that it is their - and not your - merchant account at risk they have an obligation to do this to ensure their processing business stays healthy.
If you don't like that then of course the alternative is to create your own payment service. You will find that it may even be impossible to get a merchant account with this risk profile so Stripe is doing you a service.
All that said, their CS rep could have done a better job at explaining all this to you.
Is that really true? I don't know - I'm genuinely asking.
Warren Buffet made his bones by investing the float from insurance premiums. Conceptually, this isn't that much different.
Why is it almost always the case CS reps don't dive into these details? I feel @pat wouldn't write his article if this was the reply he got.
If your chargeback rate is that much higher, this is the cost of doing business. Don't like it, use another provider. Many will kick you to the kerb, or hike your rates if you're as bad as Stripe suggest.
Get your bank-initiated refund rate down (provide some obvious customer service) and you'll get better terms.
Paraphrasing to give the sense of the original phrase: “until further notice (i.e. indefinitely), as new funds come in we will withhold 25% of them for 28 days (rolling).”
This -is- being nice and empathetic for a payment processor.
It's a defense mechanism to make sure the customer earning you 1k a month in fees doesn't go under and leave you with a 50k bill. All payment processors do it for that reason.
Obviously with Covid people cannot travel and hence need no need for parking.
That way you wouldn't have people calling their banks to cancel, you would have less chargebacks & you wouldn't have this 25% reserve. You would not need to complain and your customers would be happier.
What the Stripe email implies is you're actually holding customer funds and refusing to give refunds & taking advantage of the Covid to keep the funds but not actually provide a service (because customers wouldn't use it). If you're providing easy refunds without any bs then Stripe is clearly in the wrong.
I mean if we start seeing other people chiming in that Stripe is making them hold a huge reserve in businesses that are not being made completely impossible by the pandemic then maybe I’ll give some credence to his accusations that this is all Stripe covering their ass for their VC obligations. But “every single travel-related business we serve is having huge jumps in their chargebacks right now and we are making you keep a much larger safety buffer because of that” sounds eminently plausible to me.
The whole thing really veered off course here.
I'm seeing this sentiment repeated in this thread.
I take no issue with it, but if Stripe moves to "fairly standard" processes, at one point do they become just-another-payment-processor?
It's fundamentally not really something payment processors can solve that if a company goes under with 100k in charge backs due, the payment processor still needs to fork over that 100k of their own money to keep their merchant accounts in good order.
As far as the really big players upstream from them were concerned, I doubt they were ever anything else. They still need a viable business model, and it's not unreasonable to protect themselves against a real risk. The problems here seem to be about how they communicated that and more generally the rather arbitrary and one-sided nature of these reserve arrangements (whether Stripe's or anyone else's) from the merchant's point of view.
If your business’ finances can’t adjust for what amounts to a 1-month billing cycle for 25% of your revenue, look inward.
Under normal circumstances, that might be a reasonable suggestion.
Under the current very unusual circumstances, even many large, well-established, normally viable businesses are engaging in massive downsizing or simply going under. Imposing that sort of condition on a business that is apparently struggling already due to a sudden change in its situation could easily be enough to break its cash flow and push it under, so it definitely shouldn't be done unless it's justified and proportionate.
The sword cuts hard but this exactly what it’s for. The underlying businesses are in trouble and payment processors don’t want to hold the bag while the business run away with premature profits. If the business cannot survive with these provisions in place it’s because they have not accurately priced in the risks and are now upset that their vendors are not interested in acts of capitalist charity.
Again, if the measure is proportionate and justified, it's fair enough to impose it. Stripe has to protect itself too.
But the idea that any business in the current unusual situation should be able to just casually take a disruption to 25% of its cash flow and if it can't then it's somehow been badly run doesn't stand up to scrutiny. Lots of otherwise viable and long-running businesses have been hit hard, sometimes terminally, by the virus situation.
If there’s any place for government intervention, this is it. But it’s a slippery slope to subsidize business that are acting like the world hasn’t changed. Unfortunately the world is complex and a business can fail due to no fault of its operators, but that has always been the case and businesses are risky endevors.
Stripe has to make sure that there are enough funds in the account to cover these transaction reversals. So I can understand where they are coming from. Trying to prove that you have enough cash in your bank account is obviously not going to work because that cash could be gone at any time or otherwise already claimed. If you got the cash then what difference does it make to you if it's in your bank or in Stripe for a month? I think this point goes against the business. One would hope that as air travel goes back to normal, the rolling reserve gets smaller. A 28 days rolling reserve should not be the end of the world.
That being said I think this could have been handled much better by Stripe. This robotic "we care so much about you which is why we are doing $tough_thing to you" that is all too common nowerdays has to stop. It's a lie. It does not help the business in any way, it is just there to prevent losses for Stripe. Please drop that BS corp speak. Give the guys a call and explain the situation. Give the guys a heads-up and some time to adjust. Don't just drop the hammer like that. Engage in a discussion, try to see what can be done together. At least try it in a human way.
If they hold 25% for 28 days and that's a huge issue, you can either switch providers or get a line of credit to give you some cushion for these events. Credit is is a reasonable and even conservative option if you know your chargebacks are temporary and you're only using it for costs you will be able to eventually cover when the 25% is released.
Such is the life of being a business owner, but luckily there are plenty of solutions to these common problems if you ask your peers. This is by no means a crisis for someone who's been in business for a while, just an annoyance.
This is what Stripe should be focused on of they really want to help improve global commerce: lowering this enormous tax.
With many other (especially 'traditional') gateways a random increase in chargebacks often leads to just being dropped from processing completely, or nearly all of it being held in reserve, sometimes for 90-180 day rolling periods for chargebacks, even more so if it's a high risk small business that may not be able to have the solvency to fund a chargeback spike.