Credit Card Merchant Accounts - How One Aspect Of Pay Pal Helps Merchants But Can Hurt Consumers

In the traditional credit card processing industry it has always been difficult, if not impossible, to obtain a merchant account for merchants who charge customers in advance for services that they have not yet performed.

The type businesses would include such businesses as health clubs, newsletters, or any type service where the consumer is paying in advance for a service that has not yet been rendered.

Traditional credit card processors will not accept these types of businesses as credit card merchants unless the business agrees, usually in writing, to charge the customer on a monthly basis instead of billing the customer up front, such as with an annual fee.

The reason is simple. Traditional credit card processing companies must abide the rules and regulations set forth by MasterCard and Visa for protection of the consumer. Both MasterCard and Visa provides very strong protection for the consumer.

This problem is as follows. What happens in the event that a merchant who has billed a customer in advance for an annual fee for a service, goes out of business.

Traditional credit card processors are part of the associations of MasterCard and Visa. When a traditional credit card processor handles the transaction, then the transaction would have been charged directly to the customers credit card. In a typical Pay Pal transaction the transaction if often funded by the customers Pay Pal balance and often the customers checking account as the secondary funding source.

So in the case of the transaction that was processed through a traditional credit card processor and the merchant goes out of business, the customer would contact the bank that issued the MasterCard or Visa (or American Express or Discover) and then the issuer of the credit card will then issue a credit to the customer. Then the processor would then in turn issue a "chargeback" to the merchant's credit card processor.

The transaction would then get reviewed and a eventually a determination would be made as to whether or not the consumer is entitled to a credit or refund.

In the event that the merchant billed the customer in advance and then went out of business prior to delivering the service for the agreed upon term, the customer always gets a refund for the transaction.

In this case, the merchant's credit card processor would then go after the defunct business owner in order to get paid for the loss caused by the merchant. In this example, the customer has excellent protection and recourse.

But if the transaction was done with Pay Pal and if the transaction was over 45 days old when the merchant went belly up, the customer has no recourse. Pay Pal will not allow a transaction to be disputed by a customer after 45 days of the initial transaction regardless of whether or not the promised service was delivered.

Since Pay Pal apparently allows merchants to bill in advance for services with an annual fee, this leaves the consumer in a very vulnerable position.

So as is stands now, under the Pay pal system, consumers that pay by Pay Pal have a lot of potential exposure when purchasing services that bill in advance. But merchants get immunized from exposure after 45 days, because of Pay Pals 45 day no dispute rule.

One thing that may help the consumer somewhat is how the consumers Pay Pal account paid for the transaction. When Pay Pal funds the consumers transaction, they always use the money in the consumers Pay Pal account first. If there are no funds in the customers account, Pay Pal will first attempt to pull funds from the consumers checking account, and then they will go to the customers credit card, if the customer has one on file.

But the customer can elect the secondary source of funds, if they wish. In these cases, it would be best for the consumer to use the credit card instead of the checking account as the secondary source. At least you will probably have some chance for recourse, dealing with your credit card issuer, as opposed to your local bank branch which allowed the debit to be done.

So as the old saying goes, buyer beware.