Why do card processing companies discourage "cash advance" activities

Question

I've been curious about something for a few days now, but I couldn't find out the reason elsewhere.

Reading through, for example, the Square terms and conditions (https://squareup.com/legal/cash-ua#limitations-on-use), they state

... you will not (a) ... (b) provide yourself a cash advance from your credit card ...

But what is the reason they don't allow this to happen via their services? Note, I am definitely not asking if using Square, or other services, to do this sort of thing should be something I should be doing, but what's in it for Square to refuse this type of transaction? Wouldn't they get a piece of the transaction like any other and profit from this? Or is there pressure or deals with the credit card companies they accept, stating that they will do their best to refuse this behavior?

Answer 1

This is most likely protecting Square's relationship with Visa/Mastercard/AMEX/etc. Credit card companies typically charge their customers a much higher interest rate with no grace period on cash advances (withdrawals made from an ATM using a credit card). If you use Square to generate something that looks like a "merchandise transaction" but instead just hand over a wad of banknotes, you're forcing the credit card company to apply their cheaper "purchases" interest rate on the transaction, plus award any applicable cashback offers^†, etc.

Square would absolutely profit off of this, but since it would result in less revenue for the partner credit card companies, that would quickly sour the relationship and could even result in them terminating their agreements with Square altogether.

<sup>† This is the kind of activity they are trying to prevent:
1. Bill yourself $5,000 for "merchandise", but instead give yourself cash.
2. Earn 1.5% cashback ($75).
3. Use $4,925 of the cash and a $75 statement credit to pay your credit card statement.
4. Pocket the difference.
5. Repeat.
Note, the fees involved probably negate any potential gain shown in this example, but I'm sure with enough creative thinking someone would figure out a way to game the system if it wasn't expressly forbidden in the terms of service</sup>

Answer 2

Square does not care if you run a $10 transaction to test the system. They are concerned with its use to move meaningful amounts of money.

There's a real risk of a scam.

1. Sell yourself $1000 in "merchandise".
2. Pay 2.7% in fees** leaving $973 in income
3. Square approves transaction routinely, transfer to your bank account.
4. Close bank account and end relationship with bank.
5. Allow a month or so to elapse.
6. Complain merchandise is counterfeit, do chargeback, get $1000 back.
7. Square tries to clawback the $973. Can't. Account's closed, you're uncollectable.

The only people who do this will be the Dunning-Kruger gang, who only think they are clever. Because of course Square will hunt them down, sue, garnish and/or prosecute them! But the expense of doing so is all on Square, making it a total lose. The cheapest resolution is to not let it happen in the first place.

It defeats the purpose of "cash advance" fees

The ~3% cash advance fees, lack of rewards points, and the higher interest rate are not just for profiteering. They reflect, and pay for, the higher risk of loaning money via cash advance: to put it indelicately, the risk of default.

Cash advance credit limits are often much lower than purchase limits.

If a merchant is selling himself phantom merchandise to get easy cash advances, it means he is not using regular ways of borrowing money. Perhaps because he can't, because he has exhausted his other opportunities to borrow, risk managers have cut him off.

Square has no reason to care either way; but the issuing bank does, and through Visa etc., they will disallow this behavior.

---

** PayPal Here's rate used here instead of Square's, to simplify math.

Answer 3

Square charges a 2.75% fee (which the merchant pays), so you would be losing money if you only got a 1.5% cashback bonus.

I would guess that the real reason Square prohibits you from getting cash is because of Visa/MC, state and federal regulations. Visa/MC probably prohibit it for regular merchants due primarily to laws that are designed to prevent money-laundering.

Certain merchants (like casinos) are allowed to give you cash advances against a credit card, but regular merchants are not allowed to do this.

It is much more difficult to get Visa/MC to approve merchants to handle cash advances and they are subject to many additional regulations. Services like Western Union will let you send cash with a regular credit card, but they are classified as "money transmitters" and must comply with additional state and federal regulations.

If Square were to allow cash advances, this would likely subject them to a bunch of additional regulations. It would cost them more to comply with these regulations and is outside their business model, so they simply prohibit it.

Answer 4

I thought this was because credit card companies charge the retailer a fee to accept credit card payments.

If you spend $100, the retailer pays $1 (or whatever percentage they have negotiated) to the credit card provider. Handing over $100 cash and paying $1 fee to Visa means a loss to the retailer. The same transaction on $100 worth of product means the loss is accepted out of the profit margin which the retailer accepts to attract custom.