Why does it even matter what type of account you use as long as you just keep your personal funds separate from your business funds...???
Plain and simple, business and consumer (aka personal) accounts have different regulatory laws that apply to them. Consumer accounts have better and more regulatory protection that business accounts do. Banking regulations for the various account types are not the same across the board.
The most important regulation I want to talk about right now is Regulation E (Electronic Funds Transfers) - I'm not going to touch on every piece, just the portion that applies to disputes and businesses. This is the regulation that protects you from fraudulent transactions, merchants that won't work with you for whatever reason and give you a refund on that double charge, etc.
Note: I will be using the term "dispute" throughout this post as that is the
legal regulatory term when this process starts. When you/client contacts the bank about a fraudulent/inaccurate transaction, you are initiating a "dispute". When the dispute investigation is complete and the person that did not "win" the dispute then has that transaction "charged-back" to their account.
I'm sure most, if not all of us have experienced a dispute, whether a client filed one against us or you had to file one yourself. If one is filed against you, it is not a fun situation. You'd rather get a colonoscopy than be apart of a disputed transaction investigation. We'll get back to that later.....ha, jk, no we won't.
You will often hear that businesses never win disputes, or PayPal always sides with the customers on disputes. First, it's not just PayPal. Every bank and payment processor has to follow Reg E, disputes will happen with any institution. The reason why it seems that the business never "wins" is because Reg E does not apply to businesses. It is a consumer regulation created to protect consumers. There was a time when businesses had no legal requirement to take action on fraudulent transactions, duplicate transactions, transactions that processed with the wrong amount, etc. So, Reg E came to save the day.
BUT, it has been turning into a "no-win" situation for businesses sometimes. You could have all of the contracts, policies, receipts, emails, texts, tweets, smoke signals proving the client is trying to play the system and you could still very well lose the dispute. And, it happens, often. There are two main reasons (there are more, but these are the most important) which are: 1) it's a consumer regulation, so the consumer already has a leg up on the business and 2) the bank does not have the legal authority to interpret your contract, policy, etc. So even though you provide that information will not guarantee you will "win".
Note: This applies to all businesses, big and small. Of course, small
businesses feel it the worst.
In no way am I saying you will not ever "win", but you need to be aware and fully prepared to "lose". That's why it's more important than ever to know who your clients are, use every type of verification tool you can, accept the proper form of payment (I don't recommend checks, read this blog as to why) Shit happens and just because you "trust" that person, it doesn't mean shit. I have witnessed countless situations of "the best person in the world", "husband of the year", "the pillar of the community" etc who does some shady shit with their finances, company finances, churches finances, etc. When someone is desperate, you have NO clue what they will do. Maybe towards the end of our banking week blog posts, I'll share a few of the worst situations I've had to help my clients through when I was in banking...let me know if you'd want to hear a few.
"But my contract says the client agrees to not submit any disputes and they did it anyway" how can the bank still side with them and not me? Well, we actually cannot legally enforce that. We can't force someone to waive those rights, because what happens if the dispute is actually warranted??? But, on the flip side, you now can take them to court for breach of contract. (The Legally Enlightened Podcast with Lisa Fraley, JD has a great episode on this exact situation - I highly recommend you take a listen -- Episode 50)
But, what happens if your business account has fraud on it or an unauthorized transaction? Legally, the bank doesn't have to do anything. The regulation doesn't apply to businesses. But, thank goodness, most banks do open a dispute and investigate. But, if you happen to run across an asshole bank that doesn't, that is why.
Who knows if the regulation will add businesses at some point or create a separate regulation to protect businesses, but as of this moment, there have been zero talks of that happening.
Lastly, we talked briefly before that if you are using a consumer account and the bank notices, they'll close the account immediately, this is a very common way it happens...a consumer calls the bank about a dispute that was opened or to open a dispute for themselves and the bank realizes the account is a consumer account used for business purposes. Bam. Account closed, do not pass go and collect $200. If you search some of the business FB groups you are in you will actually see posts from people saying this exact situation happened to them.
We'll stop here for now, but our next post will describe what actually happens during a dispute investigation and the steps you can take to try and protect yourself.
Your Compliance Bestie
>> This post is informational and educational only and is not legal advice, nor does it create a consultant-client relationship. Please consult your legal counsel for further guidance on this topic. <<
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>> This is post is educational and informational only and is not legal or tax advice nor does it create a client-consultant relationship.<<