Square confirms setting aside some users' money for reserve funds after complaints

Financial transaction company responded to customer concerns that it is withholding 20-30% of their funds

Jack Dorsey's financial services company, Square, on Tuesday responded to users who expressed concern that Square was withholding their money.

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The company said in a blog post that it started using reserves, or a retained earnings tool that aims to protect customer transactions, in late 2019 and expanded the service during coronavirus. Fewer than 0.3 percent of its millions of users have reserves.

"Reserves are a standard tool used by payment processors and other financial institutions to protect buyers and help account holders avoid a negative balance as a result of situations like chargebacks," Square wrote in a blog post. "At Square, we use a 'rolling reserve,' in which a percentage of a seller's processing volume is set aside and released on a rolling basis."

Square app on tablet / Squareup.com

Square added that those reserve funds "still belong to the seller and are only used if that seller is unable to cover disputes, refunds, or outstanding fees; if no disputes occur, they receive the full amount" in 120 days.

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A number of square users have complained about the practice on social media.

The New York Times reported on Tuesday that Square clients who use the company's services to complete transactions and keep track of financial data were concerned that the company was withholding 20 to 30 percent of the money they collected from customers "with little warning" and despite the fact that they had no return or risk issues.

One user named Jesse Larsen, the owner of PennyWise Contracting in Olympia, Wash., told the Times that Square was withholding 30 percent of each of his transactions in early May, which amounted to thousands of dollars and forced him to sell his boat and other property to keep his company afloat.

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Square said it only applies reserves to its "risky" sellers, "such as those that take pre-payment on goods or services delivered at a future date, sell goods or services more prone to disputes, or operate in an industry that historically receives higher chargeback rates than others, among other factors."

Square app on smartphone/ Squareup.com

More than 1,400 people have signed a petition from an organization called the Small Business Owners of America demanding Square stop its reserves policy as of Tuesday.

The petition states that Square does not offer an "appeal process" or any "way to verify funds, contracts, methods, etc." for those who are included in its reserve policy.

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"Small businesses can barely survive as it is, and now that Square, Inc. is withholding funds, many more small businesses are going to be closing because of Square," the petition states.

It also mentions Sqaure's required transaction fees, which is how the company makes the majority of its profit.

"Square charges transaction fees, and if you are any small business owner, the transaction fees add up," the Small Business Owners wrote. "Square continues to take their transaction fees, and besides that, they are now withholding funds for 120+ days, without any recourse or isolated reason."

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