FI311 Unit 9 Fintech Ethics Scenario Response Example

Allowed by the Contract, Hard to Defend: A Unit 9 Ethics Scenario Response on a Ninety-Day Payout Freeze

[Student Name]

Purdue University Global

FI311: FinTech Law and Ethics

Unit 9 Ethics Scenario Response

[Instructor Name]

[Date]

The bakery, the payment facilitator and every figure are composite; the book, article and network rules cited are real.

The Facts

The bakery is a two-person shop that normally processes about $9,000 a month in card sales through a payment facilitator, a company that lets small merchants accept cards under its own merchant account rather than opening one with a bank. In November it began taking preorders for holiday cakes and specialty breads to be picked up in early January. By mid-December it had taken $38,000 in card payments, more than four times its usual month.

The facilitator's risk model flagged the spike. Within a day, every payout to the bakery stopped: not only the preorder money but also its ordinary daily sales. An automated email cited the merchant agreement, which allows the facilitator to "hold funds or establish a reserve at its sole discretion for up to ninety days" when it sees elevated risk. The owner called and was told the hold was automatic and could not be reviewed for thirty days. She needed about $14,000 to buy flour, butter and packaging to fill the orders she had already been paid for.

The Legal Position

The law does not settle this case. The agreement plainly allows the hold. Card network rules make the facilitator responsible for the merchants it brings onto the network and expect it to manage their risk (Visa, 2024). If the bakery took $38,000 and failed to deliver, its customers would dispute the charges, and the facilitator, not the bakery's customers or the card networks, would pay those chargebacks if the bakery could not. The facilitator has a legitimate interest in not losing that money.

A response that stopped at "the contract allows it" would miss the assignment's question. The question is whether the facilitator acted rightly in using the power the contract gave it in this way.

Was Some Hold Justified?

Yes. A sudden fourfold increase in sales for future delivery is a classic sign of a merchant that might take money and disappear, and the facilitator cannot tell from the numbers alone whether it is looking at a successful holiday season or a fraud. Some protection for the money customers have paid for goods not yet delivered is reasonable, and it protects those customers as well as the facilitator.

Was This Hold Justified?

No, for three reasons.

It was broader than the risk. The risk was the $38,000 of preorders not yet delivered. The facilitator also froze the bakery's ordinary daily sales, for which customers walked out with bread in hand and chargeback risk was minimal. Holding those funds protected nothing.

It lasted longer than the risk. The preorders were for pickup in early January. Once a cake has been picked up, the risk of a non-delivery chargeback on that order largely disappears. A ninety-day hold kept money for weeks after the goods had been delivered.

It removed the bakery's ability to reduce the risk. The surest way for the facilitator to avoid chargebacks was for the bakery to fill its orders. By holding every dollar, the facilitator made it harder for the bakery to buy ingredients, which made non-delivery more likely, not less.

The facilitator had a good reason for some hold and no good reason for this one, because a hold sized and timed to the risk would have protected it just as well while letting the bakery do the one thing that actually ended the risk, which was baking the cakes.

The Ethical Analysis

Three lenses lead to the same conclusion.

Consequences. Counting the effects on everyone involved, the blanket hold produced harm with little offsetting benefit. The bakery risked failing to deliver, the customers risked losing their cakes and then filing disputes, and the facilitator risked the very chargebacks it feared. A narrower reserve would have produced better outcomes for every party.

Fairness and proportionality. Business ethics writers stress that power granted by a contract carries a duty to use it reasonably, particularly when one party drafts the terms and the other cannot negotiate them (Boatright & Smith, 2017). A two-person bakery had no realistic ability to bargain over the ninety-day clause. That imbalance does not void the clause, but it raises the standard for how the stronger party uses it.

Respect for persons. The owner was told no human could review her case for thirty days. Treating a merchant's survival as a matter for an automated rule, with no way to explain the spike, treats her as a risk score rather than as a business partner with information the model lacked, such as a list of preorders with customers' names and pickup dates.

Why Facilitators Behave This Way

The facilitator's incentives explain the hold without justifying it. A facilitator earns a small margin on each transaction and bears the full loss of a merchant's fraud, so it is rational for it to err toward caution. Payment platforms must also keep both sides, merchants and card networks, satisfied, and the networks' rules push risk onto the facilitator (Rochet & Tirole, 2003). Automation lets one risk team watch thousands of merchants, but it also means a model makes decisions no person examines.

A Fair Policy

The response recommends a policy the facilitator could apply to every merchant like this one:

1. Reserve, don't freeze. Hold about 25 percent of preorder receipts as a reserve, roughly the share of customers who might dispute if delivery failed, and continue paying out daily walk-in sales normally.

2. Release as risk falls. Release the reserve as preorders are picked up, using the merchant's own pickup records or a sample of customer confirmations.

3. Human review within two business days. Any hold over a set amount should trigger a call from a person who can ask what caused the spike and adjust the hold.

4. Plain notice. Explain in the agreement, in plain language, that seasonal preorders may trigger a partial reserve, so merchants can plan.

An Objection

A defender of the facilitator might argue that any exception invites fraudsters to claim a seasonal spike. The worry is fair, and it explains why the policy asks for pickup records and a call rather than taking the merchant's word. Fraudsters seldom supply customer lists that can be checked, and a partial reserve still protects the facilitator if one does.

Conclusion

The facilitator acted within its contract and for a legitimate reason, and still acted wrongly, because it used a broad power without fitting it to the actual risk. A reserve of about a quarter of the preorders, released as cakes were collected, would have protected the facilitator and the bakery's customers while keeping the bakery able to bake.

References

Boatright, J. R., & Smith, J. D. (2017). Ethics and the conduct of business (8th ed.). Pearson.

Rochet, J.-C., & Tirole, J. (2003). Platform competition in two-sided markets. Journal of the European Economic Association, 1(4), 990-1029. https://doi.org/10.1162/154247603322493212

Visa. (2024). Visa core rules and Visa product and service rules. Visa Inc.