Is Square In The Wrong For Withholding Thousands Of Dollars From Their Clients?

I don’t have to tell you why 2020 has been a tough year for independent business owners. We’re still in the middle of a pandemic (with few signs of slowing down anytime soon), a deteriorating economy crippled with high unemployment, and the possibility of more shutdowns and quarantines potentially looming.    

On top of those issues, some small businesses are facing another problem: Square.   

According to a recent article in The New York Times, Square sent their customers a notice stating they’re holding 20 to 30-percent of all transactions in a reserve account, which will be held for 120 days. Square’s reasoning? To protect against potential customer chargebacks. This policy has drawn the ire of many small business owners, who claim that they do not have a history of chargebacks   

To add salt to the already infected wound of business owners, there was no way to get a hold of reserved funds even with an appeals process.    

In a statement, Square implemented reserves to combat against those sellers that “take pre-payment on goods or services delivered at a future date, sell goods or services more prone to disputes, or operate in an industry that historically receives higher chargeback rates than others, among other factors.”   

They further added that specific industries could become “riskier” based on consumers affected by COVID. Square doesn’t outright define “risky,” but they cite using reserves in 2019 for businesses selling CBD products, an industry with higher returns and chargebacks.   

If you’ve read any of my articles on Forbes, you know my stance on small business. I think small business is the backbone of America. But maybe we shouldn’t villainize Square just yet.   

While I would agree with critics that this is not a good look for Square, there are some justifiable reasons for their decisions.   

To start, in the first quarter of 2020, Square reported a substantial increase in transaction losses, nearly four times higher than that same period last year.   

Next, implementing reserves isn’t illegal for Square to do, and they aren’t the only company implementing this policy. While other payment processors have long had these policies in effect, Square’s use of the tool began more recently.

In fact, Square customers agree to the reserve when entering into the relationship, even if Square does or does not elect to apply it. As outlined in the agreement, Square’s general terms of service note they “may amend the Terms at any time with notice that we deem to be reasonable under the circumstances.”  

It goes on to read, “The Revised Version will be effective as of the time it is posted…Your continued use of the Services after the posting of a Revised Version constitutes your acceptance of such Revised Version. Any Dispute…that arose before the changes will be governed by the Terms in place when the Dispute arose.”  

Finally, only a very small percentage (0.3-percent) of Square’s millions of customers are affected by this policy change to protect them against chargebacks and complaints. If this is true, that will constitute about 90,000 total customers.  

For us, “risky” businesses are contractors, manufacturers, and retailers. We work with these types of businesses all the time. For example, a contractor will do some work for a residential client and receive payment via a credit card. A week goes by, and the client notices something is wrong. After many attempts to get the contractor to come back to fix the mistakes, or get a refund, the client contacts their bank to dispute the charges.   

This hasn’t stopped since the pandemic, either. It’s likely worsened as money has gotten tighter for everyone.   

It’s certainly reasonable to say that individual businesses within an industry can be less risky than the collective whole. It’s no different than an 18-year-old driver with a perfect driving record. That individual may have a clean record, but drivers under 25-years-of-age are labeled high risk and carry higher insurance costs and premiums.   

Just because an individual business doesn’t have a history of chargebacks doesn’t mean it won’t happen in the future.   

Is it right for Square to put a reserve on man small businesses? Not entirely, no, but they have the right to implement changes they deem as necessary, and they certainly must live with that decision. Whether the purpose of Square’s new provision is to protect their customers or protect themselves from shareholders, remains to be seen.    

While I certainly can question the morality of their decision, I don’t have the full story to decide whether Square’s decision is reasonably justifiable.  

Has Square’s policy, the downturn in the economy, or any other factor impacted your ability to properly manage your cash flow or any other areas of your business? We’re offering free individual assistance to business owners, which made possible through our 20-plus-year partnership with the US Conference of Mayors.   

Give us a call at 855-876-5561.  

There are absolutely no obligations, and the advice is free! Let us determine if there is a way to help you.