PayPal : Hit by Coronavirus -- and a 30% Holdback by the Payment Processor

By Peter Rudegeair and AnnaMaria Andriotis

Payment processors tell customers they will take care of the nagging details. But lately they are emerging as yet another headache for businesses hit hard by the new coronavirus.

Processors like PayPal Holdings Inc., Stripe Inc., Square Inc. and Worldpay are making some businesses wait additional days or weeks to access funds deposited in their accounts, citing the need to protect themselves against possible losses when people who have bought airline tickets, vacation packages and some other goods and services seek refunds.

That is intensifying the cash crunch at many firms already devastated by lockdowns and changes in consumer behavior.

Square emailed Bluebonnet Photography, a portrait studio in Tacoma, Wash., on May 6, saying it would start holding 30% of each of Bluebonnet's transactions for 120 days "to protect you and Square from unexpected loss events."

"I've really been left in a lurch," said Tamara Hudson, Bluebonnet's owner. Many customers were already canceling photo shoots because of the coronavirus.

Square said in the email that the decision was based on factors including an industry being more prone to payment disputes and the length of time the company has been using Square.

Ms. Hudson said Bluebonnet had never had a disputed transaction in three years with Square. In addition to processing about $100,000 in payments through Square each year, she said, Bluebonnet offered installment financing for photo shoots through Square's lending arm and used Square's software to help customers book studio sessions and run marketing campaigns. Now, Ms. Hudson said, she plans to drop the company.

A Square spokesman said that less than 1% of customers were told that some of their future sales would be placed into a reserve account, typically businesses that collect payments in advance of delivering goods, sell high-risk goods or services or receive high rates of disputes.

From mid-March until the end of April, credit-card holders contested two to three times as many purchases as they did before the pandemic, according to Aite Group, a research and consulting firm. That excludes purchases flagged as fraudulent.

Those disputes, also known as chargebacks, accounted for 0.05% of credit-card transactions before the pandemic, according to the research and consulting firm Mercator Advisory Group, whose statistics do include fraudulent purchases. Now, in certain categories, including travel, chargebacks are as high as 40%.

Businesses that charge customers up front for goods and services they promise to deliver in the future are particularly at risk. Among PayPal's merchants in travel and events, some companies recently were paying out more in refunds than they were taking in with new bookings, PayPal Chief Financial Officer John Rainey said at a May investor conference.

"Chargebacks have been this small leak in the plumbing somewhere that no one's cared about," said Adrian Sanders, CEO of Chargehound, which makes software to help merchants deal with disputed purchases. Now, "this is a place where the pipe can actually burst." (PayPal is a minority investor in Chargehound.)

Banks and financial-technology companies charge fees to help businesses process credit-card transactions. Square's signature white credit-card readers, for example, let businesses accept payments with a smartphone or tablet.

When a customer makes a purchase, the funds associated with the payment flow from the customer's credit-card issuer through a card network like Visa Inc. to a payment processor like Square or PayPal. The processor then places the money in the business's account, usually within a few days, minus the cut taken for itself and other financial intermediaries.

It is usually the merchant who has to cover the cost when a customer asks for a refund. But if a merchant goes out of business, the processor can be left to cover those charges.

The processors say they need to make sure the merchants' customers can get repaid when they demand refunds.

The costs of disputed purchases can add up quickly for processors, which can also face additional fees from card networks for excessive chargebacks. Square reported a $106 million loss for the first quarter after it more than tripled the amount it had to set aside to cover potential losses on transactions and loans.

Stripe on April 1 told ThrashAir LLC, a Valley Village, Calif.-based company that pilots and ferries high-performance aircraft for their owners, that it would wait 14 days before releasing any funds that came into ThrashAir's account. "We've noticed an increase in customer refunds and chargebacks in your industry," Stripe wrote in an email to owner Christopher Thrasher.

Mr. Thrasher said he didn't fault Stripe for trying to manage a difficult situation. But he called its customer-service line to complain that he was being unfairly lumped in with harder-hit airlines when he hadn't lost any business. After he made his case, Stripe reversed course.

"I think they're just trying to protect themselves, but they didn't really seem to put a lot of thought into the fact that that can cripple a business," Mr. Thrasher said.

Andy Ruiz had less luck. Stonegate Pharmacy in Austin, Texas, which Mr. Ruiz helps run, recently opened an online store to sell hand sanitizer and tapped Stripe to process the payments.

After processing nearly $15,000 in Stonegate's online sales, Stripe deactivated its account, saying it was at high risk for disputed transactions. Stripe also said it would hold on to Stonegate's money for 120 days to help cover any refunds.

Stripe offers its customers an online dashboard that monitors payment trends, and it showed that Stonegate had no transactions classified as "high-risk." Mr. Ruiz brought that up with Stripe's support team but was told the decision was final.

A Stripe spokesman declined to comment.

Even businesses thriving in the pandemic have hit snags. The Wild Initiative LLC, a digital marketing and content firm in Red Bluff, Calif., catering to the outdoor-recreation industry, used PayPal to invoice customers and get paid. It has received so much interest recently that it hired three contractors, said Chief Executive Samuel Ayres.

In early May, PayPal informed him that because it noticed an "unusually large increase" in sales activity, any cumulative sales it received over $10,000 would be held for three weeks. Mr. Ayres requested immediate access to those funds but said PayPal rejected him.

At the end of May, Mr. Ayres had to use his personal credit card to make payroll because PayPal had frozen about $5,000. The episode prompted him to switch to another processor.

PayPal relaxed its stance on the Wild Initiative's account after being contacted by The Wall Street Journal. A PayPal spokeswoman said the company uses both data and manual reviews so it can be flexible with merchants' individual policies.

Mr. Ayres still has no plans to use PayPal again.

Write to Peter Rudegeair at [e-mail] and AnnaMaria Andriotis at [e-mail]