SETTLEMENT ASSETS AND OBLIGATIONS

6 Months Ended

Jun. 30, 2021

Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]

Consumer Payments Segment

In the Company’s Consumer Payments reportable segment, funds settlement refers to the process of transferring funds for sales and credits between card issuers and merchants. The standards of the card networks restrict non-members, such as the Company, from performing funds settlement or accessing merchant settlement funds. Instead, these funds must be in the possession of a member bank until the merchant is funded. The Company has agreements with member banks which allow the Company to route transactions under the member bank's control to clear transactions through the card networks. Timing differences, interchange fees, merchant reserves and exception items cause differences between the amounts received from the card networks and the amounts funded to the merchants. Since settlement funds are required to be in the possession of a member bank until the merchant is funded, these funds are not assets of the Company and the associated obligations related to these funds are not liabilities of the Company. Therefore, neither is recognized in the Company’s consolidated balance sheets.

Member banks held merchant funds of $120.9 million and $103.8 million at June 30, 2021 and December 31, 2020, respectively.

Exception items include items such as customer chargeback amounts received from merchants and other losses. Under agreements between the Company and its merchant customers, the merchants assume liability for such chargebacks and losses. If the Company is ultimately unable to collect amounts from the merchants for any charges or losses due to merchant fraud, insolvency, bankruptcy or any other reason, it may be liable for these charges. In order to mitigate the risk of such liability, the Company may (1) require certain merchants to establish and maintain reserves designed to protect the Company from such charges or losses under its risk-based underwriting policy and (2) engage with certain ISOs in partner programs in which the ISOs assume liability for these charges or losses. A merchant reserve account is funded by the merchant and held by the member bank during the term of the merchant agreement. Unused merchant reserves are returned to the merchant after termination of the merchant agreement or in certain instances upon a reassessment of risks during the term of the merchant agreement.

Exception items that become the liability of the Company are recorded as merchant losses, a component of costs of services in the consolidated statements of operations. Exception items that the Company is still attempting to collect from the merchants through the funds settlement process or merchant reserves are recognized as settlement assets in the Company’s consolidated balance sheets, with an offsetting reserve for those amounts the Company estimates it will not be able to recover. Expenses for actual and estimated merchant losses for the three months and six months ended June 30, 2021 were $0.6 million and $1.0 million, respectively. Expenses for actual and estimated merchant losses for the three months and six months ended June 30, 2020 were $1.2 million and $2.1 million, respectively.

Commercial Payments Segment

In the Company’s Commercial Payments segment, the Company earns revenue from certain of its services by processing transactions for financial institutions and other business customers. Customers transfer funds to the Company, which are held in either company-owned bank accounts controlled by the Company or bank-owned For the Benefit Of ("FBO") accounts controlled by the banks, until such time as the transactions are settled with the customer payees. Amounts due to customer payees that are held by the Company in Company-owned bank accounts are included in restricted cash. Amounts due to customer payees that are held in bank-owned FBO accounts are not assets of the Company and the associated obligations related to these funds are not liabilities of the Company; therefore, neither is recognized in the Company’s consolidated balance sheets. Bank-owned FBO accounts held funds of $57.9 million at June 30, 2021, which was the result of a transfer of customer restricted cash from Company-owned bank accounts to bank-owned FBO accounts due to a change in our business practice for certain types of customer deposits and cash advance payments. Company-owned bank accounts held $11.3 million at June 30, 2021 and $72.9 million at December 31, 2020; therefore, these cash balances are included within restricted cash and settlement obligations in the Company’s consolidated balance sheets.

The Company's settlement assets and obligations at June 30, 2021 and December 31, 2020 were as follows:


(in thousands)	June 30, 2021		December 31, 2020
Settlement Assets:
Card settlements due from merchants, net of estimated losses	$	722	$	753



Settlement Obligations:
Due to customer payees	$	11,278	$	72,878