How to Deal With Merchant Account Holds and Processing Freezes
In today’s rapidly expanding digital economy, credit card transactions generate substantial income for diverse types of businesses. Insider Intelligence predicts that in-store credit card transactions in the U.S. will record a 3.2% YoY growth in 2022. What’s more, impressive eCommerce growth may propel online credit card usage over the $500 billion mark this year.
To keep this momentum going, retail and eCommerce merchants rely on the dependable processing of credit and debit card transactions. An unexpected account hold—and potentially an account freeze—can deal a serious blow to merchants’ businesses. In this article, we’ll help you learn what’s behind these account disruptions and how to prevent them.
What Is a Merchant Account Hold?
A merchant account hold is one of the most annoying things a small business owner can experience. This scenario occurs after the retail store owner or eCommerce merchant completes a payment processing transaction.
Normally, the small business owner would soon receive their net proceeds in their business bank account. Instead, the merchant’s payment processor executes a merchant account hold. The already-processed funds are held in a secure repository until the processor releases them. Until this occurs, the merchant’s transaction is not considered settled.
The merchant can keep processing credit card and debit card transactions until the payment processor lifts the account hold. However, the merchant will not receive their Visa, Mastercard, American Express, or Discover card network proceeds until that occurs.
How Account Holds Differ From Reserves
The payment processor implements an account hold in reaction to a perceived discrepancy in a merchant’s account. In contrast, a reserve is a proactive hold placed on a certain percentage of the merchant’s processing volume. A rolling reserve keeps this reserve in place, with the older funds being released while new funds take their place.
What Is a Credit Card Processing Freeze?
Merchants who regularly process card transactions regard any business disruption as an expensive inconvenience. Not surprisingly, they consider a credit card processing freeze as the worst-case scenario.
If the merchant’s credit card processor institutes a freeze, the business owner cannot accept any card transactions. In-process transaction incomes will be held until the payment processing company lifts the freeze.
During this period, the payment processor conducts an investigation into a certain aspect of the merchant’s processing activities. If the investigation results in a favorable outcome, the merchant can again process card transactions.
Although some freeze investigations only take a few business days, others can take weeks or even months. With little (or no) income, a small business with a tight cash flow could be forced to shut down.
What Are the Main Causes of Account Holds and Freezes?
Account holds and freezes can occur for multiple reasons. Most factors pertain to the merchant’s card processing practices. However, the payment processor’s business interests could also be the cause.
1. The Payment Processor’s Business Interests
Not surprisingly, the payment processing company wants to protect its own interests in its business relationships with merchants. The payment processor often pays the merchant before receiving the funds from the customer’s issuing bank.
Sometimes, the payment processor may think the issuing bank won’t follow through with the payment. To avoid absorbing the unsuccessful transaction, the processor delays its payment to the merchant.
2. Merchant-related Concerns
The payment processor may suspect that something isn’t quite right with a merchant’s payment processing practices. In such cases, the processor places a hold or freeze on the account until they undertake an investigation.
a) Violation of Processing Agreement Terms
The merchant account setup process requires the merchant to complete and sign a standard merchant services agreement. In it, the payment processing company states the account’s rules, regulations, and applicable fees. The payment processor also lists the merchant’s allowable processing volume and average ticket size.
The merchant must also describe the general goods or services they will sell. Many merchant agreements include a list of prohibited items such as digital goods, firearms, and pharmaceuticals. Payment aggregators such as PayPal, Stripe, and Square publicly advertise their list of prohibited items.
A business owner who starts another company should obtain a separate account for those transactions. The merchant should not process the new business’ sales under their existing merchant account. This could cause them to exceed monthly processing volume estimates. This behavior could also lead to suspicion of inappropriate activities.
During the account underwriting process, the merchant services provider bases its acceptance decision on the merchant’s answers. Ideally, the merchant will adhere to all the account provisions to which they agreed. If the payment processor suspects otherwise, it can hold the account funds while it investigates the issue.
Finally, the payment processor can reinstate the account or terminate it. If the account is reinstated, the merchant might have to wait up to 180 days to receive their withheld funds.
b) Processing Higher Than Declared Volumes
Each merchant account application requires the merchant to specify their average ticket size. They must also state the average expected monthly processing volume. Although many merchants treat these figures as mere formality, merchant account providers take them seriously.
Let’s say the merchant’s average ticket size and monthly processing volume exceed their previously stated estimates. The payment processor will note the discrepancy and decide whether to hold funds or terminate the account completely. To avoid either scenario, merchants should report average ticket or average processing volume changes to their payment processor.
c) Suspicion of Card Fraud
Payment processors consistently monitor their merchants’ activities for any potential sign of fraud. For example, a merchant might suddenly have a large short-term jump in sales volume. They might unexpectedly begin processing many large transactions through their point of sale (or POS) system. In such cases, the processor might notice a drastic shift in the merchant’s overall payment processing patterns.
Next, the payment processor will place a hold on the account while they conduct an investigation. If they don’t find evidence of fraud, they will release the funds for deposit into the merchant’s bank account. If the payment processor confirms that fraud occurred, they will terminate the merchant’s account.
d) Excessive Number of Chargebacks
Merchants who incur too many chargebacks can face merchant account termination. In fact, excessive chargebacks are the primary reason for account terminations. Even if the merchant wins the chargeback case, the chargeback counts against them. If the payment processor decides not to terminate the account, the merchant may still face the imposition of account holds or reserves.
e) Active Chargeback Investigation
Sometimes, a cardholder initiates a chargeback request in dispute of a previously completed transaction. The customer’s bank (or the issuing bank) conducts an investigation to determine the validity of the request. While that occurs, the bank removes the funds from the merchant’s account.
Let’s say the bank resolves the dispute in the merchant’s favor. The bank may still place a hold on the merchant’s funds before releasing them at its discretion.
f) Taking Payments for Other Businesses
A payment processor issues a merchant account to a specific individual or business. The merchant agrees that they will only process credit card payments for this business entity.
Let’s say, the merchant decides to process transactions for a friend’s new business that’s currently without payment processing services. This practice is called credit card factoring, and it is not allowed under any circumstances. Once the payment processor discovers the deception, the merchant is likely to see a swift account termination.
What to Do When Your Funds Are Withheld
A merchant often doesn’t realize their funds are being held or frozen until a transaction won’t go through. Alternatively, the merchant’s sales records and bank statements don’t match.
If the merchant’s funds are indeed frozen, they must allow the process to run its course. During the investigation, keeping a respectful dialogue with the payment processor’s risk management department is advisable.
The merchant should quickly provide any needed documentation. The merchant may also want to consult with an attorney familiar with bank card law.
Until the issue is resolved, the merchant may wish to apply for a small business loan or line of credit. Completing a processing agreement with a backup third-party processor is also worth consideration.
When Does a Merchant Account Termination Occur?
Sometimes, the processor’s investigation determines that a merchant clearly violated their service agreement terms. Therefore, the processor decides to terminate the merchant’s account. In such an event, the merchant cannot process any more card transactions through the processor’s payment gateway.
If the processor finds proof of deliberate account misuse or other fraud, the merchant could also face fines or penalties. Certain cases may also merit criminal charges.
The merchant’s name will also be added to the shared Terminated Merchant File (or TMF). This means the merchant will find it harder to find a payment processor who will work with them. The merchant must apply for a high-risk merchant account with stiff processing fees, monthly fees, and restrictions.
How to Prevent Merchant Account Holds and Freezes
The good news is that merchants can take certain actions to prevent account holds and freezes. These five steps will minimize any payment processing hiccups.
1. Choose the Right Payment Processor
A merchant should do their homework before selecting a payment processor. Two processing structures exist, each one catering to different-stage businesses.
Direct Agreement Model
This traditional merchant account model provides the business with a dedicated account. Account terms may be negotiable based on the business’ industry type and processing history.
Opening a direct account requires an underwriting process. These accounts are more suitable for higher-volume established businesses.
A third-party processor groups individual business users into one aggregate merchant account. Therefore, these entities are often called “payment aggregators.”
These payment processors don’t closely vet applicants before accepting them as processing partners. So, using the third-party model results in faster onboarding.
However, businesses face a later audit and potential account holds or terminations. A third-party model is more cost-effective for lower-volume or mobile businesses.
2. Adhere to Merchant Agreement Terms
Merchants should always read and adhere to their merchant agreement terms. First, they should only sell the types of merchandise they described in their application. They should also not exceed their estimated processing volumes.
Maybe the merchant wants to expand their product line. Perhaps they anticipate a spike in sales, as might occur in a beach town’s seasonal business. In such cases, the merchant should advise their payment processor’s risk management department about these scenarios.
3. Minimize Chargebacks
Excessive chargebacks can lead to other negative consequences. Therefore, merchants should take steps to minimize their chargeback risks. Using anti-fraud integrations is a positive first step. The merchant should also enable EMV chip card processing and verify each customer’s CVV number.
4. Avoid Processing Another Entity’s Sales
Merchants should stay away from processing transactions for other individuals or businesses. This is known as “credit card factoring” and is highly illegal. This practice will almost certainly result in account termination.
5. Proactively Communicate With the Payment Processor
Merchants should always advise their payment processors of upcoming changes to their operations. By keeping the lines of communication open, the processor’s risk department won’t be surprised at a deviation from the norm. That can mean the difference between continued smooth operations and an account hold or termination.
Work With a Reputable Payment Processor
To minimize the chances of an account hold or freeze, merchants should always adhere to their merchant agreement terms. Choosing a well-regarded payment processor sets the stage for favorable payment processing outcomes.
Payment Depot is known for its small business-friendly operations and excellent customer service. Its membership-based model offers favorable pricing, no add-on fees, and no cancellation penalties. Contact our award-winning team to find out how we can help you save up to $400 in credit card processing every month.
Some merchants may have misconceptions about account holds and freezes. Here are the answers to two frequently asked questions.
Can Your Payment Processor Legally Hold Your Funds?
The short answer is yes, the payment processor can legally hold a merchant’s funds at its discretion. The merchant agreed to this “hold funds” provision when signing the merchant agreement with the credit card processor.
This practice is a standard operating procedure in the payment processing industry. In essence, the merchant’s acquiring bank (or acquirer) is advancing the funds to the merchant before the transaction is completed.
Fronting the merchant’s funds creates a risk for the financial institution. Not surprisingly, the bank wants to ensure that it can recoup those advanced funds. The merchant will not be able to negotiate this provision out of the agreement.
Does a Merchant’s Personal Credit Affect Freezes?
A merchant’s personal credit can help to determine whether they are approved for a merchant account. Alternatively, the payment processor may place a rolling reserve on the account instead of holding funds after the transaction. The processor could also require a co-signer on the account.
After the merchant account is approved, however, the merchant’s personal credit is no longer a factor. In other words, their personal credit has no effect on potential account holds or freezes.