Nothing will result in a more complete standstill for your business than an issue with your business’s payment processing abilities. Regardless of whether it is a freeze on your processing ability, withheld funds or the termination of your processing account, these situations can often result in devastating effects for your business.
A merchant account hold occurs when a payment processor temporarily withholds settlements from a merchant’s account. During a merchant account hold, the merchant cannot access the withheld funds, which directly impacts cash flow and working capital. Merchant account holds can disrupt cash flow and make funding day-to-day operations difficult.
A merchant account freeze is even more serious than a hold and can halt operations overnight for businesses dependent on digital transactions. Payment processors may initiate a merchant account freeze due to suspected fraud or compliance issues, and this action is often allowed by specific contractual clauses.
Processors can legally hold or freeze funds based on terms outlined in the merchant processing agreement (MPA), which is the binding contract between merchants and payment processors. Merchants have rights under their Merchant Processing Agreement regarding holds and freezes, making it important to understand and comply with its key clauses to avoid disputes or account disruptions.
The good news is there are some things you can do to avoid issues related to merchant account holds, freezes and terminations, with five tips found here.
Introduction to Merchant Account Issues
Merchant account issues, such as holds and freezes, can have a serious impact on your business’s cash flow and daily operations. A merchant account is essential for any business that wants to accept credit cards and process card payments efficiently. When account holds and freezes occur, they can disrupt your ability to process payments, pay suppliers, and meet payroll, putting your entire business at risk.
Payment processors and merchant account providers are responsible for monitoring transactions and managing risk to prevent fraudulent transactions. While these measures are designed to protect both businesses and customers, they can sometimes result in account holds or freezes if suspicious activity is detected. Common causes include sudden spikes in transaction volume, unusual activity that doesn’t match your business model, or potential fraud. Understanding these risks and how payment processors operate is the first step in preventing merchant account issues. By staying informed and proactive, you can minimize the chances of experiencing disruptive holds and freezes on your account.
Choose the Right Processor
There are two types of agreements: a direct agreement and third-party agreement. In some cases, merchants operating in specific industries may also require a unique direct agreement, which is called a high-risk merchant account. Your merchant account provider and acquiring bank play a key role in determining your eligibility and risk profile, especially if your business deals with restricted or prohibited products. Understanding the approval process—including the steps and requirements for product compliance—is crucial for ensuring you meet all necessary criteria before proceeding.
During onboarding, your processing history and risk profile are evaluated by the merchant account provider and acquiring bank. Full disclosure about previous terminations is important, as failing to do so can lead to further issues. Merchants placed on the MATCH list may find it difficult to obtain a new merchant account for up to five years, which can significantly impact business operations.
It is important that you get to know the options available to determine which one is right for your business. Understanding the differences between a dedicated merchant account and a payment aggregator will help you choose the best fit for your size, risk level, and growth plans. After all, a small retail shop and a large box store will not need the same processing power or abilities. Finally, always conduct a thorough contract review to ensure you fully understand your merchant processing agreement and avoid unfavorable terms.
Set Expectations and Stick to Them
Did you know that making too much money may become an issue? Processors want to see stability. They expect you to have a steady processing volume from one month to the next. When filling out a traditional merchant account application, you will present information about your average transaction size and expected volume. This information is then used to identify any suspicious activity.
If you want to avoid issues, make sure to let your processor know if you are going to have a busy month and take in more sales and transactions than usual. Sudden spikes or sudden volume spikes in transaction volume can raise flags for payment processors and may trigger a fraud review or even a hold or freeze on your merchant account. Monitoring transaction patterns is an important preventative measure to help identify unusual activity that could trigger a review by your payment processor. Proactively notifying your payment processor of any expected changes in transaction volume is a key preventative measure to avoid merchant account holds and freezes. This will help prevent the aforementioned flags for suspicion.
Sell What You Said You Would Sell
If you misrepresent your business and don’t sell what you said you would, this may lead to having your account terminated. You should never try to lie or “fudge” the details on an application because you may be considered a high-risk industry that would require higher interchange fees. While it may be tempting to try to bend the truth to reduce the fees you have to have, in the long run this is going to backfire.
It is important to make accurate marketing claims and maintain precise business descriptions during onboarding, as inaccurate or vague business descriptions can result in compliance issues that trigger merchant account holds and freezes. Choosing a transparent, reliable provider and steering clear of credit card processors to avoid can further reduce the risk of unexpected account problems. Non compliance with payment processor policies or providing inaccurate information can also lead to account holds or freezes.
Don’t Mix Accounts
Another way you may have your merchant account closed is by using it for several types of business. Any type of suspicious or unusual activity can result in a review. Unusual activity can trigger a review process by your payment processor, which may include a temporary merchant credit hold if suspected fraud is detected. Suspected fraud can lead to a merchant account hold for review as soon as signs of fraud appear. To avoid unnecessary holds, merchants should maintain accurate and up-to-date documentation.
If you have several transactions that don’t “fit” the type of business you claim to be doing, it can indicate something inappropriate. It may also affect your processing limits. It’s equally important to understand your fee structure and look for ways to lower credit card processing fees without resorting to risky behaviors that might trigger a review.
Minimize Chargebacks and Fraud
While chargebacks are inevitable for most businesses, they also represent a fast way to freeze, hold or terminate an account. High chargeback rates and excessive chargebacks are leading causes of merchant account holds, freezes, and account suspension. Excessive chargebacks can make a merchant appear high-risk, leading to reserve requirements or account holds. Customer disputes can increase chargeback rates, which may result in account holds or cancellations due to non-compliance with network thresholds. Chargebacks can cause merchants to lose money, both from the transaction itself and from additional fees or withheld funds. Proactively managing and reducing chargebacks is essential to avoid being flagged as high-risk by payment processors. High risk businesses, such as those with high chargeback ratios or operating in subscription models, are more likely to face rolling reserves, where a percentage of sales is held for a set period to cover potential chargebacks. Closely examining your processing costs and eliminating hidden fees, as discussed in our guide on what Shark Tank would say about your card processor, can also strengthen your margins as you work to control chargebacks. Account suspension can result from excessive chargebacks, PCI DSS non-compliance, or failure to adhere to payment network standards. To avoid chargebacks, provide customers with the high-level product or service promised, or provide gift cards rather than a chargeback to the credit card processor.
Ensuring Regulatory Compliance
Regulatory compliance is a critical factor in preventing merchant account holds and freezes. Payment processors are required to follow strict regulations, such as anti-money laundering (AML) and know-your-customer (KYC) laws, to ensure the integrity of the payment processing system. As a business owner, you must also comply with these regulations to avoid account holds and freezes that can interrupt your payment processing.
One of the most important requirements is PCI DSS compliance, which mandates that businesses implement strong security measures to protect customer payment data. Failing to comply with PCI DSS can not only result in account holds and freezes but may also lead to hefty fines and damage to your reputation. To stay compliant, regularly review your merchant agreements, keep accurate records like bank statements, and implement effective risk management strategies to detect and prevent suspicious transactions. Reviewing comprehensive merchant services FAQs for small businesses can also clarify how your processor handles security, deposits, and support so you can stay ahead of potential issues. By making regulatory compliance a priority, you can reduce the risk of account holds and freezes, maintain uninterrupted access to your merchant account, and build trust with your payment processors and customers.
Handling Problems: Prevention Is Key
If you do face merchant account holds, freeze or termination, it’s essential not to panic and to respond promptly to your provider’s emails. Having access to 24/7 expert payment support can make it easier to gather documentation, resolve technical issues, and communicate effectively with your processor during an investigation. If your merchant account is frozen, the processor will typically stop the flow of funds, preventing access to money from past transactions in your bank account. A frozen merchant account or frozen account may trigger a processor’s investigation, which can take weeks or even months to resolve. To expedite the resolution process, communicate effectively with your payment processor and provide all requested documentation, such as invoices and proof of delivery. Merchants can appeal a hold or freeze by contacting their processor and supplying all necessary documentation. If a merchant account is frozen, the processor may release funds after a set period, such as 90 or 180 days, depending on the outcome of the investigation. Avoid making major changes to your account while a hold or freeze is in place, as this can increase the provider’s risk perception.
Keeping payment processor policies in mind and staying compliant can help prevent merchant account holds. Proactively managing your account, being transparent with your payment processor, and maintaining accurate and up-to-date documentation are key strategies to prevent merchant account holds and freezes. Merchants can challenge excessive or prolonged fund retention by issuing a formal legal notice demanding release within a defined timeframe, and should demand written justification from processors when holds or freezes occur. If a processor exceeds its contractual authority in holding funds, legal remedies may arise for the merchant. In some situations, it may also be possible to negotiate or even waive a credit card processing cancellation fee if you decide to change providers. Always follow the dispute resolution clause in your Merchant Processing Agreement before filing litigation.
The best option is to avoid this from occurring to begin with by using the tips found here. Velocity Merchant Services is a full-service merchant services company that can help you evaluate processors, equipment, and risk controls. If you rely on POS hardware, you should also monitor performance and address issues like slow or outdated POS systems before they disrupt transactions and raise red flags with your processor. You can also contact us at Velocity Merchant Services to receive help and guidance with choosing the right processor or find us online at getvms.com
