How to Avoid Merchant Account Holds, Freezes and Terminations

withheld-fundsNothing can bring your business to a screeching halt like a hiccup in your payment processing flow.

Whether it’s withheld funds, a freeze on processing ability, or a complete termination of your account; any and all scenarios are a nuisance at best, and devastating at worst.

In the following article we’ll discuss the main reasons why processors hold funds, freeze transactions, or close merchant accounts entirely. We’ll also look at ways to prevent such undesirable outcomes.

Hold vs. Freeze vs. Termination

There’s not always a clear definition between a hold on funds, a processing freeze, or account termination, so let’s define each one:

Withheld Funds
A hold on funds generally refers to the procedure by which a processor withholds X amount of a merchant’s processing volume due to “suspicious” transactions. Once held, those funds will not be deposited to the merchant’s checking account, and can be held indefinitely pending an investigation. Moreover, funds from open authorizations (i.e. recently processed transactions) may be withheld as well.

A hold may occur in unison with a processing freeze (see below), but not in every case. Sometimes the processor may allow the merchant to continue processing new transactions, so as to prevent them from having to shut down their ability to accept credit cards completely.

Freeze on Processing
Simply put, a processing freeze is when the processor temporarily shuts down a merchant’s payment processing abilities.

Termination (Closure)
This is pretty self-explanatory. Commonly, a processor will terminate an account if they deem a merchant to be in clear violation of their terms.

Setting Expectations, Then Sticking to Them

Initially when opening a merchant account with any processor, the merchant is responsible for signing a document known as a “merchant service agreement (MSA).” This piece of paper lists all the rules and fees the merchant must abide by, including limitations on average processing volume (i.e. average monthly sales), average ticket (i.e. average individual transaction amount), and business merchandise.

Since breaking any of the rules in the service agreement can result in a merchant account hold, freeze, or termination, merchants should carefully read the fine print and be completely honest and forthright in their disclosure of all aspects of their business. Accurately listing your projected average monthly volume, average daily ticket, and business services and/or products is extremely important. Going outside the realm of those declarations can result in immediate repercussions by the processor.

Preventing Freezes, Holds and Terminations

There are plenty of reasons why a processor might take action against your account. Here are the most common ones, and ways to prevent them from happening to you:

Stay within your average monthly volume and ticket.
An unusually high processing volume or average ticket is one of the fastest ways to get your funds held. Although it sounds strange, as a merchant you can actually be punished for making too much money! That’s not to say you should start turning customers away once you hit your service agreement quota. But, simply notifying your provider of an expected busy month or unusually large transaction can keep a hold from happening. Be especially careful around the holiday season, when sales usually spike. If you receive an unusually large order, call your provider to let them know before running the transaction. Often, with an abnormally high sales volume, your provider will hold your funds until customers receive their credit card statements and an adequate amount of time has passed for them to review and relay any disputes or chargebacks. In this single aspect, keeping the lines of communication open with your provider is your best defense against a hold.

Sell what you said you’d sell.
Your provider looks at the items sold as another security measure against your merchant account. Using your account to sell strange goods could violate your MSA, resulting in a hold, freeze or termination. For example, if you are in the business of selling pool supplies and they start seeing transactions for patio furniture as well, that is an immediate red flag.

It’s also important to keep your bank notified of items being added to, or removed from, your inventory. The same can be said of businesses selling services. Furthermore, new merchandise/services often come with new prices, and thus new sales figures. Meaning a changing inventory can also change your average ticket and average processing volume.

Give yourself more wiggle room by providing a generalized product description in your MSA. For example, instead of saying “diet pills” say “nutritional supplements,” which covers a broader area of diet pills, powders, vitamins, and herbs.

One account per business type.
The absolute quickest way for a merchant account to be fully terminated is if it is being used for a different business altogether. As a multiple-business owner, it pays to have separate merchant accounts for each business. If you are running a fitness center Monday through Friday, but also running a weekend business providing surf lessons, each business should have a separate account.

Minimize chargebacks.
Chargebacks, although inevitable, should always be limited. Whether won or lost, an excessive number of chargebacks is a red flag to a provider, which can result in a hold and pending investigation of your business. For more information on chargebacks and limiting them please refer to the chargeback article.

Use appropriate merchant account types.
Merchant accounts come in all different types, but one specific determinant to pay especially close attention to is card-present (retail) and card-not-present accounts (internet). A card-present account means that both the customer and their credit card are present at the time of the transaction, like any standard swipes done at a mall department store. A card-not-present account means neither card nor person are present at the time of transaction, like doing holiday shopping on Amazon.com. Obviously card-not-present accounts retain a higher risk, thus higher fees and stricter rules. However, if you are a business involved in a large number of both types of transactions, you must inform your processor about it. They’ll then suggest that you open both a retail and internet merchant account. A large number of card-not-present transactions on a card-present account, or vice versa, can result in a hold or termination of your account.

Minimize fraud.
Any other sort of processing behavior your provider deems as suspicious will result in an account hold. In our modern digital age, identity theft has become the fastest growing crime. Credit card fraud runs rampant, so providers monitor their clients transactions for any signs of fishy behavior. If fraud is suspected, your account will be frozen pending an investigation.

There are dozens of fraud prevention tools and services out there. Both Visa (Verified by Visa) and MasterCard (SecureCode) have come up with great fraud fighting tools that can be used by any merchant, starting today.

Conclusion

As a merchant, you will only notice a freeze or hold once a customer tries to swipe their credit card to start a transaction and it does not go through, or by reviewing your checking ledger and not seeing anymore deposits coming through.

So, once you are held, then what?

Well, unfortunately you’re pretty much powerless. You must simply let the process run its course. Every hold incites an investigation, which results in either a release of funds OR termination of the account depending on if you are found at fault or innocent.

Whatever the result of the investigation, avoiding a hold is your primary defense. Besides bringing your business to a standstill, frozen accounts can look bad on your business record, preventing other providers from wanting to do business with you in the future, and making it harder to get a merchant account elsewhere.

Although the system of checks and balances is put in place to protect both merchants and customers, the system is not foolproof, and often times innocent merchants get flagged. In these cases, it’s best to have a backup account already instituted to continue day-to-day business, until the investigation is completed and you are absolved of all suspicions.

In a worst case scenario, a merchant account hold results in account termination, following which the merchant is added to the terminated merchant file (TMF). The business world’s version of a “scarlet letter,” the TMF list mars reputations, increasing difficulty of obtaining future merchant accounts from other providers, not to mention the additional penalties of being fined and possibly indicted with criminal charges. At this point, obviously legal counsel is a merchant’s best recourse.

The bottom line in maintaining live processing and regular deposits is in keeping open lines of communication with your provider. Make your account contact your best friend, and let them know of any and all changes to your business. Get the contact information for the underwriting or risk department, so you can get in touch with them as well. Being proactive is the best protection against a plug in your stream of business.

Amad Ebrahimi
Amad has worked in the eCommerce and online marketing world since 2002. He started as an eBay seller, then slowly graduated to building & marketing his own websites and consulting others to do the same. He founded Merchant Maverick out of frustration with all the misinformation and shady tactics that he encountered when trying to find a merchant account for his and his client's businesses. He's the man behind most of the merchant account reviews, and articles posted on MerchantMaverick.com. Have any questions related to credit card processing? Talk to him.
Amad Ebrahimi
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5 Comments

    Alex

    Hi,

    Good tips and well put.

    I have a problem i hope you can help me with:

    I have a business that is less than a year old and opened an account with First Data when first started operating.
    When first started the business we were doing mostly retail sales, but quickly moved to doing mostly wholesale sales and carrying more products.
    Last August, after a very busy month, i noticed that there is a batch of about $10,000 that is not clearing into our account.
    A short phone call to a First data rep revealed to us that due to the high volume in sales, they decided to look into our account, when they then noticed that we are not selling only kitchen accessories as we filled out in the original application, but also selling key chains and novelty items which we started selling short time before, and never knew that we need to notify First Data that we are selling.
    They said that the account will be terminated, and the funds will be held until their investigation will be over, probably after 6 months.
    In addition to that we were asked to send them all the invoices that we had created to our customers, and all the shipping receipts as well to prove that the customers actually received the goods.
    Not only that, but they had us paying ‘investigation fees’ in the amount of $25 per page(!) that they requested us to send them!
    After we sent them everything that they wanted, they agreed to release $5000 to our account, while keeping another $5000 for 6 months.
    They also sent us a termination letter that says that we will need to pay for the investigation and cancellation fees.

    My questions are:

    - Are these investigation fees normal? why should i pay for their investigation and for cancellation if they initiated them and not me?

    -If i am planing to open a new merchant account with a different company (lets say ‘Leaders’) – should i be worried from that this incident will show on our credit report? If that is the case, should i form a new company and get a new EIN number before applying for an account with a different processor?

    Thanks,

    Alex.

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    sam

    Hi I need a reliable merchant account any advice ??

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    Tom DeSimone

    Hi Sam,

    Check out our comparison chart to see some of our favorite providers! Any questions, don’t hesitate to ask.

    Good luck,
    Tom

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    Tom

    Hi there Amad,

    I am curious what the maximum amount of time a financial institution is allowed to withhold once funds for? As a business owner i hear all the time of 30,60 & 90 day accounts. But i have never heard of funds having the right to be withheld for 180 days (6 months). Surely this is excessive and against the law as these funds are still my or my customers funds.

    Please can you help shed some light on this

    Many thanks
    Tom

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    Tom DeSimone

    Hi Tom,

    The answer is complicated. I’m not familiar with the actual laws surrounding this, but I am familiar with the industry standards – and I am working on the assumption that the industry standards are not illegal. But, that said, laws and contract terms certainly may vary from state to state, and definitely vary from country to country. Here’s what I know:

    In most processing contracts, you’ll see a section which states that the processor has the right to withhold funds if they have reasonable suspicion that chargebacks may take place. They usually reserve the right to withhold the funds in reserve until (a) the chargeback takes place, at which point the funds would still be withheld but not in the reserve account, (b) enough time has passed that a chargeback is no longer legally possible, or (c) they have otherwise determined that a chargeback will not take place.

    In general, a customer has a maximum 120 days before chargeback rights are forfeited, although that number could be less depending on the reason for the chargeback. In most cases, this is 120 calendar days from the date the transaction took place, 180 days for international transactions. But in the case of faulty/defective merchandise, it is 120 days after noticing the problem – a maximum of 540 days after the original transaction! This only applies to certain type of chargebacks, but it can happen. Plus don’t forget to tack on the month or two that the actual chargeback arbitration will take should a chargeback occur.

    The real answer is: it depends. It depends on the type of goods or service, the reason for the chargeback, and the exact language of the processing contract. It also depends on which card network the transaction was processed through.

    Hope this helps!
    TD

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