Merchants square off against Dorsey brands

Square Inc. is making headlines again, this time for its revised merchant account reserve policy, which the company described as a safeguard against escalating chargebacks and refunds during the global coronavirus pandemic. To add insult to injury, merchants who challenge the issue on Twitter are being blocked by the social media platform, according to New York Times journalist Nathaniel Popper.

In his June 23, 2020 article, "Square, Jack Dorsey's Pay Service, Is Withholding Money Merchants Say They Need," Popper reported that thousands of small and midsize businesses (SMBs) are seeing Square hold back 30 percent of credit card revenues for 120 days as a hedge against refunds and chargebacks. Among them, Sean Weber, a website designer and two-year customer with no chargeback history, is trying to get the company to release his funds.

"Mr. Weber said he had since had to miss the $3,000 monthly mortgage payment on his home while looking for a new payment processor," Popper wrote. "When he complained about Square's policy on Twitter, the company blocked him, something it has also done to other customers who have publicly brought up the issue."

If you don't like it, leave

While Jack Dorsey, CEO of Square Inc. and Twitter, has not publicly commented on the matter, Square's June 23, 2020, blog post, "Why Square Uses Reserves," defended its "rolling reserve" practice as a way to protect buyers and sellers.

"Recently we enhanced our reserves process by ensuring that sellers receive an even earlier notice of a reserve decision before the policy goes into effect," Square representatives wrote. "This gives them more time to choose whether they want to continue processing with Square under these new conditions, in advance of taking more payments."

Square's comments are inconsistent with customer reports that Square had not appropriately notified them nor offered a reinstatement process, Popper noted. He added that Dorsey "is facing a growing chorus of unhappy customers."

CX squared

Unlike numerous payments industry efforts designed to help Main Street businesses, critics say, Square is exacerbating distress by holding back reduced earnings as merchants struggle to survive. Recent data from CardFlight's Small Business Impact Report shows sales growth remains flat as U.S. businesses slowly reopen. Published June 24, 2020, the latest edition found sales volumes declined by 1.1 percent compared to the previous week, while transaction counts increased by 2.6 percent overall, with substantial gains in the following growth categories:

• Food and beverage sales were up slightly more than 8 percent last week.
• Retail sales grew for third consecutive week.
• Healthcare businesses grew more than 176.2 percent compared to early April's pandemic low.

In addition, Square's earnings report reflects flat sales in retail and hospitality sectors. And in a May 2020, letter to shareholders, Dorsey and Square Chief Financial Officer Amrita Ahuja reported $109 million in transaction and loan losses in the first quarter of 2020, with a 33 percent increase in operating expenses ($520 million) and 33 percent increase in non-GAAP operating expenses ($423 million).

"In the first quarter, we recorded incremental loss reserves to reflect the anticipated impact of COVID-19, based on trends during the first quarter and probability-weighted potential outcomes," Square stated. "This included reserves of $79 million for transaction losses and reserves of $22 million for outstanding Square Capital loans. On a dollar basis, these reserve estimates were approximately 4x higher than the fourth quarter of 2019 for each of our Seller transaction and Square Capital businesses."

Petition gains signatures

A growing chorus of complainants, many of whom have been silenced on Twitter, are demanding restitution via an online petition organized by Change.org, a certified B corporation. Petitioners are calling for Square to stop withholding income from their customers for 120 days and to provide a formal appeals process to thousands of merchants affected by the policy.

Observing that Square is not paying interest on withheld funds, Change.org stated, "Small businesses can barely survive as it is, and now that Square, Inc. is withholding funds, many more small businesses are going to be closing because of Square."

Change.org petitioners further noted that they are seeking legal counsel, setting the stage for a possible class action against Square. Additional information about the change.org petition can be found at www.change.org/p/square-capital-llc-square-is-withholding-funds-from-small-businesses-over-120-days-without-negative-history-during-covid-19-epidemic .

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