Credit Card Processor Square Faces Lawsuit Over Merchant Payment Holds

Lawsuit

Last month we reported that Square notified a small business merchant that it would withhold 30 percent of the transaction amount in a Reserve for up to 120 days.

The small business owner in our story had no chargebacks or other payment problems and when he asked Square for details, they did not provide any actionable information or a method to appeal the decision.

This business owner provides B2B advertising and marketing services and had been with Square for some time, so he was not a new account.

After we posted the story in our Facebook Group several members complained they also received these notifications.

Most complaints were similar; no warnings; no account issues or current problems; just a notice from Square they would hold a portion of the payments now in Reserve. Most stated the same 30 percent and 120 days policy.

Based on the information in our Facebook group and from emails we received, it seems Square is identifying specific business categories as higher risk categories and punishes those businesses by withholding funds in a Reserve.

Square Now Faces Lawsuit Over Its Reserve Process

We now have learned one company had enough regarding this practice and they filed a Business Tort lawsuit against Square.

The case is Mon Ethos Pro Consulting, LLC (Mon Ethos) versus Square Capital, LLC (Square) and it was filed in May in the Superior Court of California (County of San Francisco).

In the complaint, Mon Ethos states:

“Plaintiff Mon Ethos seeks relief in law and equity, and compensatory and punitive damages, against defendants Square Capital, LLC and Square, Inc. d/b/a Square Capital of California, LLC, [Square] as merchant credit card processors, for their breaches of contract, and their fraudulent, grossly negligent, intentional, and unfair and deceptive actions, including, but not limited to, wrongfully withholding merchant payments due, owing, and rightfully belonging to Plaintiff.”

“The actions and misconduct of the defendants, and each of them, are particularly offensive as they are attempting to seize and hold thirty (30%) of all of Plaintiff’s transactions, without Plaintiff’s authorization, during a time when Plaintiff is suffering from the economic devastation caused by the worldwide shutdown due to the coronavirus (“COVID-19”) crisis.”

“On or about April 23, 2020, without justification or Plaintiff’s authorization, Defendants notified Plaintiff that Defendants unilaterally instituted a 120-day hold on thirty percent
(30%) of all transactions processed for Plaintiff.”

“There have been no disputed payments or chargebacks generated through Plaintiff’s transactions processed by Defendants.”

In general, the allegations in the lawsuit are similar to the complaints we have received in our Facebook Group and in emails.

Square Targeting Industry Segments

Based on this information, it appears Square is targeting events businesses, service and repair businesses, and businesses offering custom products that typically would collect deposits.

The primary complaint from merchants is similar, they received this notice without warning and only vague explanations such as being in a business category that is “prone to receiving payment disputes”, “length of time you’ve [merchant] been processing payments with Square”, and “business documents we [Square] may have on file.”

There appears to be no transparency to this process and no direct actionable solution for a merchant to work with Square to lift the Reserve.

In the company’s payment processing terms, Square only addresses the issues of Reserves in a vague paragraph and provides no specific details when a merchant may trigger an action by Square that could result in a Reserve, suspension, or other action:

“If we believe you might incur, or you are incurring, an excessive amount of Chargebacks, we may establish additional conditions governing your Square Account, including (a) establishing new processing fees, (b) creating a Reserve in an amount reasonably determined by us to cover anticipated Chargebacks and related fees, (c) delaying payouts, or (d) terminating or suspending the Payment Services.”

Customer Service vs Blunt Action

While complaints from merchants about payment processors are not uncommon, these reports we have received do not seem to be based on a specific trigger such as after a complaint or chargeback.

Often, when complaints about payment processors surface, they usually involve open disputes, specific issues, or an accumulation of various issues.

In this case, it seems Square is proactively deciding to place restrictions on merchant accounts that have no chargeback issues and are not dealing with open claims.

Assuming Square has legitimate concerns about certain types of businesses, it appears the company is failing at customer service and communication.

For many small business owners, a reduction of 30 percent on sales for 120 days is not a sustainable solution. It’s especially hurtful if the business had no issues that would warrant such a restriction.

If Square continues to restrict more small business accounts, it will force more small business owners to look for alternative payment solutions and there are plenty of options in the marketplace.

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