The Green Sheet Online Edition

I referred your question to Linda Grimm, a bankcard consultant, who provided the following answer:

The question of the timing of settlement and delayed delivery comes up quite often, as there are many misconceptions out there. The answer to your question is that Visa Inc. and MasterCard Worldwide require a merchant to deposit a transaction receipt only when the merchant has:

• Completed the transaction
• Shipped or provided the goods
• Performed the purchased service
• Obtained the cardholder's consent for a recurring transaction

As with all things Visa and MasterCard, there are exceptions. Visa and MasterCard allow for merchants to have delayed delivery transactions. These occur when there is an initial deposit, say, for a custom ordered product like furniture, and a final payment when the goods are completed and delivered. In this case the requirement is to deposit the transaction within three business days of the transaction date of the "deposit" and of the "final payment," respectively. Neither card brand stipulates how much time can transpire between the deposit and the final payment; that is up to the merchant and the circumstances around the transaction.

The 30-day rule you referenced may be from MasterCard's requirement for a merchant with multiple locations using a central facility to accumulate and present records to the acquirer; the maximum time allowed for presentment is 30 calendar days from the transaction date (Visa allows 21 calendar days).

The real question around delayed delivery, however, is the risk tolerance of the bank. While the regulations allow for it, the bank may not be willing to accept the extended liability that this type of transaction activity presents. The longer it is between the transaction and when the customer receives the goods/services, the greater the risk of something going wrong.

Take, for example, a furniture store that takes orders for custom furniture. When everything is going well, the merchant can pay the suppliers for the custom furniture with the money received from that customer. Let's say business starts to slow down, and the merchant needs to use some of the deposit money for rent or utilities, hoping business will pick back up so the merchant can pay the supplier for the custom furniture.

The economy is tough; business does not pick up. But the merchant, in desperation, continues to take orders using the deposit from customer B to pay for the furniture for customer A. Eventually, this causes the merchant to collapse; the supplier demands payment, but the merchant doesn't have enough new business to pay for the old orders. Now the customers want their furniture or their money back, and the merchant is out of business. Guess who has to pay for those chargebacks: the acquiring bank.

This type of extended liability is a major risk concern for acquiring banks and is why banks often require reserves and/or are unwilling to accept merchants with delayed delivery beyond 60 to 90 days.

Thank you, Linda, for such a thorough response. I hope this provides exactly the information you need, Ryan. Best of luck to you.

Editor