s an ISO, what if you encourage a processor to terminate a faltering, vulnerable merchant and then prevent the merchant from doing post-termination refunds? You make out like a bandit because a considerable portion of the pending transactions become chargebacks instead of refunds, and you earn a percentage of the penalty fees the chargebacks incur. That's a boon, right?

Don't be fooled by folderol

If you think this is the road to riches, think again.

Yes, you will lose money if you allow terminated merchants to perform refunds rather than force them into chargebacks. So it may seem strange that I'm discouraging you from earning additional revenue. But discourage you I must because engaging in this kind of coercion gives our industry a bad name.

Merchants are a lot like consumers. If they are unfairly treated, even in a termination scenario, their anger about being wronged could come back to haunt the industry in the form of unwanted government oversight and mandatory regulations.

Processors are required under card Association rules to terminate merchants that have even slightly excessive chargebacks. Often, at the time of termination a merchant isn't able to deliver the goods involved in pending transactions because of cash flow or other problems. The processor then can either permit the merchant to cancel and refund the pending transactions, or process them knowing that many will be charged back.

Unfortunately, a number of processors do not permit merchants to mitigate damages at this critical moment. And ISOs that are focused on immediate gain are also not motivated to assist the crumbling merchant in reducing chargebacks.

Play by the rules

Card Association rules do not allow banks or processors to prevent merchants from carrying out refunds - even after an account has been terminated. This rule is frequently violated; some of the biggest banks and processors in the acquiring industry do so regularly.

Of course, banks and processors have a vested interest in forbidding refunds and encouraging chargebacks because of the fees they earn on chargebacks. But those that violate this rule are too shortsighted to see the negative effects of this form of merchant abuse.

Abusing merchants is reckless

When a bank or processor forces a terminated merchant into chargebacks, there are several negative consequences:

• Reputational damage to the abusing bank, processor and ISO
• Reputational damage to the card Associations
• Increased business opportunities for aggregators and offshore processors
• Increased chargeback exposure flowing from an artificial restriction on merchant cash flow.

Banks and processors often justify the decision to force merchants to accrue chargebacks by asserting that they cannot perform refunds because the banks hold insufficient reserves for the merchants in question.

In other words, banks threaten to induce chargebacks to coerce merchants into providing them with greater reserves. For merchants who are well funded, this may carry some weight. However, for merchants who depend heavily on credit card cash flow, this is unworkable.

How not to burn your bridges

All terminations should be managed with the same degree of care given to budding relationships. Both parties to a merchant agreement should make a diligent effort to fully apprise themselves of all relevant facts.

As ISOs know very well, banks occasionally terminate merchants because of isolated incidents which were beyond the merchants' control. Whether or not the termination is justified, the way it is handled is crucial in preserving the reputation of the parties concerned and the acquiring industry as a whole.

Here are some guidelines to follow:

• If a bank intends to terminate a merchant, it should first inform the processor or ISO that is managing the relationship and fully explain the reasons for the proposed termination.

• Before the merchant is informed, the ISO should have an opportunity to discuss with the bank whether the decision for termination is well founded based only on the information available to the bank.

• If, after the initial consultation, the bank remains set on termination, and if the ISO wishes to preserve the merchant relationship, then the ISO should communicate with the merchant about the circumstances of the proposed termination to obtain facts that may be unknown to the bank.

  The ISO will then be able to advocate on behalf of the merchant in dealing with the bank. (Many unjustified merchant terminations could be halted at this point simply by adhering to these guidelines.)

• If the ISO is unable to salvage the merchant relationship, and a decision to terminate proceeds, a conference call involving the merchant, the ISO and the bank should take place immediately. The purpose of a call is simple: to coordinate the termination procedure.

There will undoubtedly be pending transactions, refunds, chargebacks, holdbacks, reserves, etc. that should be addressed fully with all three parties on board. Failure to do this mutual planning could result in unnecessary losses for the ISO, the processor and the bank.

During this conversation, the bank should fully disclose the extent of reserves it holds on behalf of the merchant and set forth what it intends to do with them. Merchants should never be left in the dark about the status of their reserves.

Following these simple, ordinary and fair procedures would prevent a number of disputes and unnecessary losses in the acquiring business.

Also, to avoid unnecessary government regulation, act surely and openly with merchants at all times during their agreements and, in particular, upon termination.

In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If you require legal advice or other expert assistance, seek the services of a competent professional. For further information on this article, e-mail Adam Atlas, Attorney at Law at atlas@adamatlas.com or call him at 514-842-0886.