Page 33 - GS230401

Education

Merchants are not likely to benefit from FDIC insurance
on the funds held in an acquiring bank settlement account
Legal ease: because the account is not a bank account belonging to the
merchants.

If an acquiring bank goes bankrupt, merchants are at risk
of losing all funds not yet settled to them by the acquiring
bank. Fortunately, merchants are usually waiting for only
Bankrupt acquiring a day or so of settlements, so loss of those funds should
hopefully not be fatal to the merchant.
bank !#* What’s an Merchant settlement funds—wholesale

Wholesale ISOs and payment facilitators (payfac)
ISO to do under the customarily take liability for merchant losses, are parties
to merchant agreements and sometimes take possession of
law? merchant face-value of funds.

Bankruptcy of the acquiring bank of a wholesale ISO or
By Adam Atlas payfac puts the ISO or payfac in the front seat with the
bank for the wreck.
Attorney at Law
If the merchants or sub-merchants have contracts with the
he ISO and payment processing industry has acquiring bank, they will be making the same unsecured
seen bankruptcies. For example, back in 2009, creditor claims as merchants of retail ISOs discussed
Cynergy Data went through bankruptcy, and above. When the merchants or sub-merchants realize
T ISOs and merchants muddled through for the there is nothing to be had from the acquiring bank, if they
most part. have direct terms with the ISO or payfac, then they will
start making claims for the face-value of unsettled funds
Bank failures, such as those of Silicon Valley Bank, versus the ISO or payfac.
Signature Bank and Silvergate Bank are, however, different
and present new risks for the processing industry. The In simple terms, a wholesale ISO or payfac often back-
purpose of this article is to consider bank failures from stops the solvency of its acquiring bank. This could result
the legal point of view of the ISO and payment processing in substantial claims versus the ISO or payfac that—
industry. ironically—might be more solvent than its own acquiring
bank.
At any given moment in time, an ISO or payment processor
has a number of "buckets" of money in play; each one It’s not a waste of time for wholesale ISOs and payfacs to
answers to its own legal paradigm. reflect on what would happen if their acquiring bank went
Merchant settlement funds—retail under—together with all merchant funds in process.
Merchant reserves
A retail ISO customarily does not assume liability for
merchant losses, is not party to merchant agreements and Reserve accounts consist of often a substantial sum of
does not take possession of merchant face-value of funds. funds held by an acquirer under a merchant agreement to
protect the processor against potential losses on account
In most retail ISO scenarios, merchant settlement funds of merchant chargebacks or other losses.
are held in a single bank-owned aggregated account of the
acquiring bank that is swept to merchants on a daily basis. Some merchants process without having given reserves,
In this scenario, the ISO is party to a merchant agreement but others must post reserves before a single transaction
with the acquiring bank and is an unsecured creditor for is processed. The amount of reserves for any given
their settlement funds. merchant is a commercial matter based on the acquirer's
credit assessment of the merchant, the track record of the
To be clear, the merchant does not typically have the benefit merchant and other factors. In any case, many thousands
of a single sweep account. Instead, funds of multiple of merchants post reserve accounts to all acquirers.
merchants are commingled, and no single merchant
can be said to be an account holder of the account. The Most merchants and ISOs perceive reserve account funds
settlement account of an acquiring bank belongs to the to be the "property" of merchants. Indeed, many ISO and
bank and is on the balance sheet of the bank. Merchants merchant agreements use language that suggest the same.
have a contractual claim versus the bank for the funds.

33