A holdback is a fixed percentage of a merchant’s total dollar volume not delivered to his account but held by the credit card processing bank to cover any future unforeseen catastrophic losses. A holdback percentage is sometimes levied on new merchant account applications if the applicant does not have sufficient credit history or assets to qualify.
A typical holdback is usually 5-10% of the gross volume held for a minimum of 180 days or longer. Once the 180 days have expired without further incident or cause for alarm by the credit card issuing bank, the funds will be released into the merchant’s designated account. In certain cases, the funds are released on an ongoing rolling basis where new funds are being withheld and added into the account while older funds are being transferred into the merchant’s designated account.
The money in the account belongs to the merchant unless there are substantial chargeback claims against it or if there is fraudulent activity on the part of the merchant. In the case of fraud, the holdback account is there to limit the liability of the credit card issuing bank and the funds will not be released until such time as all activity has been finalized.
There are a lot of unanswered questions surrounding holdback accounts that have yet to be properly explained by the acquiring banks that actually oversee them. Problems arose immediately following The Fair Credit Billing Act of 1978.
The act mandated credit card companies to back all credit purchases with insurance in the event that goods and services weren’t delivered. With clothing and other consumer goods this is really not a big problem. But with airlines it is.
Airline tickets are bought and paid for in advance of their use and if for some unknown reason the airline stops flying, credit card companies are liable to repay large sums of money. And with the new law in place there was no way out.
Acquiring banks First Data and First Tennessee didn’t want to process credit card payments for airlines who were desperate for the business. The solution came about when First Data announced a 50% holdback for airline ticket purchases and holdback accounts became serious business.
Even today it’s not crystal clear who owns the funds that sit in designated holdback accounts. There is clearly interest as well as other financial gains being made by simply having the money under someone’s care. Who should receive that side benefit was never clearly defined. The law of 1978 makes it perfectly clear who is liable to reimburse in the event of disputes but the mechanism for securing those payments is still cloudy.
Historically, the funds in holdback accounts have been handled appropriately. Ultimately, credit card holders get reimbursed and ultimately the liable parties are able to recoup their losses. If you are a merchant who is involved with a holdback account you can rest assured that the acquiring bank is going to hold, send and watch over the funds exactly as it is laid out in your contract. Be a good merchant and elevate your status to a point where the holdback account is no longer part of your business.