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Unfortunately, successful e-commerce stores and digital goods providers often find themselves in disputes with their payment processing companies. Whether these disputes arise over an underpayment, a chargeback, or the mishandling of sales tracking data, payment processing disputes often hinge on the interpretation of the payment processing contract, which can contain onerous and one-sided terms. These terms may include arbitration provisions, liquidated damages clauses, termination penalties, and provisions allowing for the retention of funds by the payment processor in the event of a dispute or chargeback.
Thankfully, our attorneys understand the legal and technological aspects of payment processing disputes. We have handled payment processing disputes both in and out of federal court, including in complex and high-stakes litigation. Additionally, we regularly review payment processing contracts for a wide range of clients, including Bitcoin exchanges, software as a service providers, and providers of digital downloads.
If you are faced with a payment processing dispute, or if you seek review of your payment processing contract, contact one of our payment processing dispute lawyers today.
Payment processing agreements are among the most lopsided commercial contracts that businesses routinely sign without legal review. Processors — including major platforms like Stripe, PayPal, Square, and Braintree — present these agreements as non-negotiable standard terms, and many merchants accept them without reading or understanding the provisions that govern what happens when something goes wrong.
Several provisions in standard payment processing agreements deserve particular attention from any business that accepts card payments. Understanding these provisions before signing — and having legal counsel involved when disputes arise — can make the difference between a business surviving a processing dispute and losing its ability to operate.
Many payment processing agreements allow the processor to establish and maintain a reserve fund — a percentage of your sales revenue that the processor holds back as security against potential chargebacks and refund claims. These reserves can be established without warning, and the processor may hold them for months or even years after your relationship ends. For a small business operating on thin margins, an unexpected reserve can be catastrophic. Processors are generally permitted to set reserves based on their assessment of your business’s risk profile, but the contractual standards governing when and how reserves can be set are often vague and susceptible to legal challenge.
Payment processors are themselves subject to chargeback monitoring programs imposed by the card networks — Visa and Mastercard have programs that impose fines and potential disqualification on processors whose merchants exceed chargeback thresholds. As a result, processors have a strong financial incentive to terminate merchants whose chargeback rates rise above a specified percentage, typically 1% of monthly transaction volume. Termination for excessive chargebacks can result in your business being placed on the MATCH list (formerly the Terminated Merchant File), a card network blacklist that makes it extremely difficult to obtain new payment processing services for up to five years.
Most payment processing agreements require merchants to resolve disputes through binding arbitration rather than litigation. Arbitration provisions in these agreements typically designate a specific arbitration forum, require individual arbitration (waiving class action rights), and may impose tight deadlines for initiating arbitration. Courts have generally upheld arbitration clauses in payment processing agreements under the Federal Arbitration Act, 9 U.S.C. § 1 et seq. Understanding the arbitration process and its practical limitations is essential before a dispute arises.
Processors can and do terminate merchant accounts with little or no notice, citing violations of acceptable use policies or elevated risk. For businesses that depend on card payments for revenue — essentially every e-commerce business — account termination is an existential event. When a termination is wrongful — based on misapplication of the agreement’s terms, discriminatory enforcement, or procedural failures — legal action may provide a remedy. We have successfully challenged wrongful payment processor terminations and obtained damages and account reinstatement for clients.
When a processor freezes or withholds merchant funds, it is often citing a contractual right to hold funds pending investigation of suspected fraud or elevated chargeback activity. But the scope of these rights and the duration of permissible holds are often subject to legal challenge. Courts have found processors liable for conversion and breach of contract when fund holds exceed what is reasonably necessary under the circumstances or when the processor fails to follow its own contractual procedures for investigating and releasing held funds.
Chargebacks — consumer disputes that result in reversal of a payment — are a significant source of revenue loss for e-commerce businesses. The chargeback process is heavily weighted in favor of the cardholder, with the merchant bearing the burden of proof to demonstrate that the transaction was authorized and that goods or services were delivered as promised. A well-documented dispute process, including order confirmations, delivery tracking, and records of customer communications, is essential for winning chargeback disputes. Our attorneys can help you develop and implement chargeback response procedures and represent you in complex chargeback disputes.
Merchants who suffer losses as a result of a payment processor’s breach of contract, wrongful termination, or improper withholding of funds have several potential legal remedies available. Claims may include breach of contract, conversion of property, violation of the Electronic Fund Transfer Act, and in egregious cases, business tort claims. The availability of specific remedies depends on the facts of the dispute, the governing state law, and the terms of the processing agreement.
Even when the processing agreement includes arbitration provisions, experienced counsel can navigate the arbitration process effectively. We have successfully represented merchants in arbitration proceedings against major payment processors and have recovered significant damages on behalf of our clients.
If your payment processor has terminated your account, withheld your funds, or otherwise breached your processing agreement, the internet and business attorneys at Revision Legal are ready to help. We have the technical and legal expertise to analyze your situation, assess your claims, and pursue the remedies you are entitled to — whether through negotiation, arbitration, or litigation. Contact us today for a consultation.
The best payment processing dispute is one that never happens. Several practices significantly reduce the likelihood of processor disputes, chargeback problems, and account terminations for e-commerce businesses.
Clear, accurate product descriptions and transparent pricing reduce chargebacks by ensuring customers know exactly what they are buying before they complete a transaction. Prompt, professional customer service that resolves complaints before they escalate to chargebacks reduces your chargeback rate and protects your merchant account standing. Maintaining thorough records of every transaction — order confirmations, fulfillment records, delivery confirmations, and customer communications — gives you the evidence you need to win chargeback disputes when they do arise.
Before signing a payment processing agreement, have legal counsel review its key provisions — particularly the reserve requirements, chargeback thresholds, termination provisions, and dispute resolution procedures. Understanding what you are agreeing to before a dispute arises puts you in a far better position than trying to interpret ambiguous contract language after the processor has frozen your funds. Revision Legal regularly reviews payment processing contracts for clients and advises on the provisions that present the most risk for specific business models.
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