Future Delivery & Risk

The concept of future delivery is not new and I am sure many of you purchase these services during the year. You pay today knowing that the good or service will not be received until a later date. Although this is a business model that many ecommerce and service based businesses must abide by it introduces unique risk when it comes to the merchants payment processor. In this article we will explore these risks and things that should be considered for the business owner.

What is future delivery in credit card processing?

Again, when referring to future delivery we are talking about paying today and not receiving the final good or service until days later. The merchant acknowledges the payment and commits to providing the goods or services to the customer within the agreed-upon timeframe or upon completion. Industries that have popularized this are service based companies such as home remodeling, plumbing, subscription services, booking travel arrangements, or custom made to order items. These are just a few examples, and there are various other industries and businesses that engage in future delivery transactions. The common thread among these merchants is that they accept credit card payments for goods or services that will be delivered or fulfilled beyond the time of the payment transaction.

The Issue Becomes Chargebacks

The biggest concern in the credit card processing industry for future delivery is the significant impact it may have in a business owner's chargeback ratios. The time gap between the transaction and the actual delivery of goods or services creates a higher risk of customer disputes. Customers may change their minds, encounter issues with the delivered items, or feel that the merchant did not fulfill their contractual obligations. This often leads them to initiate chargebacks to request refunds from their credit card issuers.

A common occurrence takes place when it comes to friendly fraud in these areas. Fraudsters may exploit the time gap to engage in fraudulent activities, such as using stolen credit card information to make a purchase and then disputing or canceling the transaction before the delivery occurs. Or simply disputing for the sake of disputing because they know they can leverage the fact that goods were not received, or claim they were not received.

To manage the impact of future delivery on chargebacks, merchants should communicate clearly with customers about delivery timelines and establish transparent refund policies. They should also maintain comprehensive documentation, providing proof of delivery, tracking information, and any communication with the customer. Proactive customer support is essential to promptly address inquiries and concerns, thereby minimizing the likelihood of chargebacks resulting from miscommunication or dissatisfaction.

Reserves may be necessary

As a business owner a reserve is more than likely going to be imposed on you if you fall into this category. Factors that would determine this decision include the processors policies that you are partnering with, what your industry type is, your risk profile financially, and also the agreement between you and the client.

Reserves in payment processing refer to funds held by a payment processor as a security measure against potential risks and losses. The most common type of reserve in payment processing is a rolling reserve. A rolling reserve involves withholding a percentage of a merchant’s daily or weekly sales for a certain period of time. For example, a payment processor may hold back 10% of the merchant’s sales for a rolling reserve period of 90 days. As new transactions are processed, the rolling reserve is continuously adjusted based on the predetermined percentage.?

For merchants involved in future delivery, payment processors may perceive an increased risk due to the extended period between payment and delivery, as well as the potential for customer disputes or cancellations. Consequently, payment processors may be more inclined to impose reserves on such merchants to protect themselves from potential financial liabilities.

About Author

Currently Mark is owner of Legacy Payments and part owner of Deposyt where he increases overall company sales by developing relationships with vertical markets to bring in new merchant processing accounts.

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