Fraud Alert and Processing Fees on Refunds

[Poshak]

Community, 

Hoping someone can assist us! 

We were alerted of a potentially high risk transaction. The transaction was processed by Square, followed by some security questions in order to release the funds. After answering all the questions, the recommendation from Square was to refund.

Here is the catch though. Square will still go ahead and retain the processing fee. This left us a bit perplexed:

- if a transaction is deemed high risk then why was it processed in the first place, and not outright declined to the cardholder?

- if processed (for whatever reason) and reco is to refund back to the cardholder (because it could result in a dispute), why would Square not refund the processing fee to merchants, and make a priory to protect merchants? 

Hope this is an oversight in their refund policy where potential fraud transactions are involved and reco from Square is to refund.

Have you encountered this scenario? Any suggestions here on best way to handle? We have not delivered goods (or got paid), but are being asked to pay for processing fees!

[TheRealChipA]

Hi @Poshak.  I’m sorry to hear about this. It’s never a fun thing to go through.

This is one of those catch-22 scenarios.  Square recently implemented their new policy of not refunding transaction fees on refunds because they are not refunded fees from Mastercard/Visa/etc.  Until recently, Square was eating these fees, which was never a good financial/business decision on their part.  Honestly, they were one of the last of their peers to implement this policy, most likely because shareholders forced them to.

Regardless, that’s the reality of refunds.  If one is made, Visa/Mastercard/etc don’t refund Square for their fees.  So Square doesn’t refund us our fees anymore.  It’s not ideal for small businesses, obviously, but it is what it is, unfortunately.  It’s not an oversight, per se.  It’s just the reality of the situation.

You didn’t mention why Square alerted you to the suspicious transaction or why it was deemed high risk.  Did someone else (Visa, for example) alert Square after the fact?  Was there an inquiry from the customer, or their bank? Remember that Square doesn’t approve transactions.  Square asks the cardholder’s issuing bank to approve them, and they only do what that bank says.  So, if anyone is at fault here, it is the cardholder’s bank since Square was only the bearer of what turned out to be bad news.  But I can guarantee you that the cardholder’s bank, nor Visa/etc, returned fees to Square, either.  You, unfortunately, as just the bottom of the hill down which the proverbial s*&t rolls, get to eat them.  No, it’s not right.  But I’m not sure you can do much about it.  Square isn’t doing anything here that all the other processors like them don’t do.  If you were processing cards through your bank, their policy would be exactly the same.  Things like this are why politicians make the big bucks — to make laws to force mega corps treat us better.  Ugh.

I’m sorry I can’t be of more practical help.  I can recommend one thing, though.  If this was an unusual transaction for your business — a much larger amount than usual, a new customer with a large amount, etc — it is always a great idea to do some vetting on your own.  Get signed transaction authorizations, for example.  Get copies of IDs, etc.  Go overboard to protect yourself.  If, however, this was just a normal transaction in your line of work, I don’t think there’s much that can be done.

One more thing.  If this transaction was through your Online Store, Square has a feature called Risk Manager where you can set up rules to flag potentially fraudulent transactions.  Then you review your transactions regularly (daily?) and can approve or deny those that are flagged.  Check it out, if that is the case. It’s pretty robust and you can configure it to be as suspicious or not as you wish.  But only for online transactions.

Best,

[Poshak]

Hi @TheRealChipA,

I appreciate the detailed response.

Based on your response, are you saying that retail stores with high volumes and with generous refund policies are absorbing this costs in their P&L? This can easily end up in millions (thinking Walmart, Home Depot, Costco, etc.). 

I can understand if the processor is keeping their slight mark up as an admin cost to cover some costs in the refund process, but to retain the full interchange can be very costly for high volume merchants (esp. if a cardholder is a premium cardholder).

Again, the details were entered through the Square checkout. Looking at the alert, it appears that billing address was not entered. If this is mandatory, why did Square send the transaction through to the issuing bank to authorize (only for it to come back to the acquirer as fraud)?

It should have stopped at the self check out forcing the cardholder to enter the address if deemed required information. 

[TheRealChipA]

@Poshak Stores with those kinds of volumes don’t use middleman processors like Square/Toast/Clover.  Square is making card processing available to everyone without having to navigate the hassles of having their own dedicated merchant account at their banks.  Trust me, that is a nightmare all in itself.  I would imagine that huge of operations negotiate rates and terms directly with processors based upon their volumes, just like chain restaurants negotiate and get the best deals on inventory purchases due to the amount of purchases they make.  And, of course, those kinds of operations do what we all should do to some extent — build into our cost of goods calculations a flat percentage dedicated to handling fraud, unexpected fees, etc.  I’m sure there are benefits of having our own merchant processing accounts that I don’t know about. 

In a way, we are talking apples and oranges a little bit here.  In our case, Square has the merchant processing account that they share with us.  They smooth out and equalize all of the complexities, interchange and other processing fees into one flat fee per transaction.  That convenience comes with a cost, and this is one of those.  The only other option would be to look into setting up your own merchant account that you negotiate with your bank.  I didn’t have much luck with that and I’m a relatively intelligent person.  It cost me much more in all the added fees and such than Square will ever cost me, and I didn’t get the benefit of the free basic POS that Square has.

Obviously, I don’t know the details of your particular transaction and your specific situation, nor should I since I’m just a fellow seller.  You can always get on the phone with Square Customer Support and see if they can do anything for you.  But for those of us who use card processing companies like Square and its competitors, this is sadly a reality of the business.  I wish I could be of more help.  I feel like I’m just muddying the waters.

Be well,