How To Keep Your Payment Processor From Holding Funds Or Terminating Your Account: What Small Businesses Need To Know

Merchant account holds or freezes disrupt your business’s ability to collect proceeds from sales. A merchant account hold allows a payment processor to temporarily withhold funds from your sales, while a freeze limits your business’s ability to process transactions.

This guide will provide an in-depth explanation of merchant account holds and freezes, including why they happen and how to avoid them. Here’s what you need to know.

(If you are on the hunt for a merchant provider, it’s good to know that the best payment processing companies for small businesses don’t make a habit of enacting unnecessary merchant account holds or freezes.)

What Is A Merchant Account Hold?

A merchant account hold occurs when a credit card processor withholds some of a merchant’s funds as a protective measure against chargebacks, refunds, or fraud. Holds are usually applied to transactions that are flagged as unusual for your business. Withheld funds are stored in separate, secure accounts.

A hold may be implemented concurrently with a processing freeze where your business will be unable to accept card payments — though this isn’t the case every time. In many cases, your business will be able to accept card payments while an account hold is in place.

What Is A Merchant Account Reserve Fund?

Merchant account reserves are the portion of funds withheld from a merchant’s business proceeds. A rolling reserve is the result of a processor choosing to continue holding a set percentage of a merchant’s daily processing volume as a guarantee. After a pre-determined number of days, those funds are released and replaced with newly processed funds.

A minimum reserve requires a specific sum to be held for a period of time. With a minimum reserve, funds won’t be released until that reserve fund is filled.

What Is A Merchant Account Processing Freeze?

A processing freeze occurs when a credit card processor temporarily suspends a merchant’s payment processing services, resulting in the business losing the ability to accept card payments. Processors use freezes to investigate a merchant’s processing habits to ensure that the merchant is adhering to the terms of their merchant agreement.

Once the investigation has been completed, the merchant may have a reserve implemented on their account, or if a contract breach was identified, the merchant account may be terminated.

Unlike an actual termination, a freeze is potentially temporary.

What’s The Difference Between Merchant Account Holds & Freezes?

The primary difference between merchant account holds and freezes is that merchant account holds still allow for a merchant to continue accepting card payments, while account freezes halt a business’s ability to accept card payments. Account holds and freezes may occur at the same time, but this isn’t always the case.

What Causes A Merchant Account Hold Or Freeze?

There are several situations in which a payment processor may place a hold on a merchant account or freeze services. Generally, merchant holds and freezes are enacted to prevent fraud and provide the processor with time to conduct an investigation into suspicious activity.

Here’s a look at some of the most common causes of merchant account holds and freezes:

• Excessive chargebacks
• Unusual merchant processing volume
• Incorrect information provided at registration
• Suspected fraud or money laundering
• Unpaid merchant fees
• Merchant operating in an unsupported industry
• Your processor is complying with a legal order

What Is A Merchant Account Termination?

Merchant account termination occurs when a processor decides to end their agreement with a merchant and discontinues services for that merchant. Generally, processors terminate an account if they deem a merchant to be in clear violation of their terms, or if the merchant has misrepresented their business in the application process.

If your merchant account has a hold placed on it or is currently frozen, your processor will conduct an investigation to ensure that your business is complying with the merchant agreement. Unless your business has broken your processor’s merchant agreement or terms of use, it’s unlikely that your business will be found in breach of contract.

Are Merchant Account Fund Holds & Freezes Legal?

The short answer is yes—you agreed to let them hold your money when you signed your contract. It is standard industry practice for merchant agreements to contain language establishing the processor’s right to hold funds, suspend services, or terminate the contract.

At the time of writing, some of the most widely used merchant services providers and payment processors, including Square, Fiserv, TSYS, and Stripe, all have terms with clauses that reserve their right to initiate account holds, freezes, and reserves.

If you’re interested in how these clauses are worded, take a look at Square’s Payment Terms document clauses reserving its right to implement holds, freezes, or reserves.

What To Do If You Experience A Merchant Account Hold, Freeze, Or Termination

If you experience a merchant account hold, freeze, or termination, there are steps you can take to help resolve the problem or reduce the financial hardship your business may experience. Here’s a breakdown of what you should do if your small business experiences a fund hold, service freeze, or an account termination.

How To Avoid Merchant Account Holds, Freezes, Or Terminations

As merchant account holds, freezes, or terminations can result in a significant disruption to your business’s cash flow, it’s essential to actively avoid triggering any of those actions against your business. Fortunately, responsible and honest use of your payment processor and strict adherence to your merchant agreement are the easiest ways to avoid adverse actions agains your merchant account.

Here’s a look at the most effective methods of avoiding account holds, freezes, or terminations.

1. Pick the Right Type of Processor

Merchant agreements are as varied and diverse as payment processors themselves. But, in the end, what you need to know is that there are two kinds of agreements: direct agreements and third-party agreements. Aside from these options, merchants in certain industries may require a specialized kind of direct agreement called a high-risk merchant account. We’ll take a look at all three of these options to help you decide which is right for you before you set out to get any sort of account.

2. Set Expectations & Stick To Them

Here’s a counter-intuitive fact: Making too much money could actually become a problem if you, as the merchant, are not careful! Processors want stability. They expect a merchant to process a relatively consistent volume from one month to the next, with mostly consistent ticket sizes.

When you apply for a traditional merchant account, you’ll provide information about your expected volume and average transaction size. Processors use this information as a baseline to identify suspicious activity.

If you are a low-volume merchant using a payment service provider (third-party processor), inconsistent processing is less of a concern because the comparative transaction volume is small and the ticket sizes are too, in most cases. Most PSPs expect to see that behavior, especially at first. (With that said, sudden, large transactions are well-documented as the source of holds and freezes for PSPs.)

Any processor is going to get a bit antsy when you go from processing $5,000 a month on average to double or triple that in the space of 30 days. Likewise, if your average ticket is $100 and suddenly you have a $1,200 transaction, the people in your processor’s underwriting department may get a bit suspicious.

The key is being clear about what volume of card payment transactions you expect to do and then sticking to it. You can also protect your business by obtaining signed invoices and purchase orders from clients. This is great evidence that a purchase is legitimate. If you know that you expect to have a busy month because of a sale or a new product launch, you should call your processor and let them know. Clear communication is a major asset in maintaining your account.

3. Sell What You Said You’d Sell

Misrepresenting your business and the products/services offered will lead to account termination. Under no circumstance should you feel tempted to fudge the details on an application because you might be in a high-risk industry or one with high interchange fees. It will backfire.

Being honest about what you do or sell is important because, when you open a merchant account, the processor assigns you an MCC — that is, a merchant category code that identifies your industry/line of work. There’s a large assortment of MCCs, and it is possible to create new ones as new industries emerge.

Your MCC determines your interchange rates (one of many credit card processing fees), which means it directly affects what you pay per transaction. It goes without saying that banks and credit card networks won’t like it when you disclose incorrect information and mess with their profit margins and industry risk assessments.

Let’s say, though, that you were honest with your processor when you signed up for the card processing services, but now you’re expanding your services or reshaping your brand to move into a new industry. The better course of action is to contact your processor and inform them of the change. If they notice suspicious transactions or see that you have a chargeback for an item/service that doesn’t fit with what they believe you offer, it could trigger a review and, quite possibly, a hold or termination.

Read your processing agreement carefully and make sure you know what it says about making changes to your business. If you want to expand your product line, make sure it’s not something high-risk. Violating that agreement is easy grounds for termination.

4. Don’t Mix Your Accounts

Another very easy way to get your merchant account terminated is to use one merchant account for multiple types of business. Again, any sort of suspicious activity can trigger a review. A series of transactions that don’t fit with your line of business will absolutely seem fishy or inappropriate. It could also affect your processing limits, giving your processor the appearance that you are exceeding them.

Not only that, but it will also make your life difficult from an accounting standpoint.

If you want to start a second business or a side hustle, you should look at a separate merchant account or a third-party processor like Square. This ensures you don’t violate the terms of your merchant agreement, which could lead to a termination. Third-party processors are great for this because they expect you to have infrequent transactions, and there is no expectation of a monthly minimum.

However, if you’ve been in business for a while and have a good relationship with your processor, it’s always worth asking about opening a second merchant account. Because you have an established history, it should be easier than if you were starting from scratch.

5. Minimize Chargebacks

Chargebacks, although inevitable for most merchants, are a quick way to a hold, a freeze, or even a termination. It’s a clear sign to processors that the merchant isn’t delivering the goods or services promised–or worse, that they’re being careless and accepting fraudulent cards. Because the merchant’s funds are taken away and held as soon as the chargeback is filed, processors become leery when chargeback numbers start to rise.

It’s very likely that if you have a sudden spike in chargebacks, you’ll encounter a hold and a freeze. Assuming you are still able to process transactions, your processor might decide to implement a rolling reserve to cover future chargebacks. This practice is the same for merchant accounts and third-party processors. However, it is possible, especially with a third-party processor, that too many chargebacks will lead straight to termination. Generally speaking, the chargeback threshold for most businesses is 1% of total transactions, though some processors might have stricter guidelines.

Merchants who deal primarily with in-person sales have less to worry about, as card-present chargebacks are quite rare. They are primarily a concern for eCommerce merchants. To help prevent chargebacks, most experts recommend having a clearly stated return policy that is visible on your website and receipts. You should also make it easy for merchants to get in contact with you.

6. Minimize Fraud

Credit card fraud is, unfortunately, a common problem for both consumers and merchants. Worse, card fraud can take many forms. It’s worth noting that with the U.S. slowly but surely transitioning to EMV cards, a great deal of card-present fraud is shifting to card-not present fraud–meaning eCommerce retailers are going to be hit the hardest. Research shows that in countries that have already switched over to EMV, CNP fraud increased astronomically at first before leveling off.

Online businesses absolutely need to take steps to protect their livelihoods. Most online payment processors offer a variety of fraud detection tools, including address verification service (AVS) checks. (Different shipping/billing addresses or a wrong zip code are often indicators of suspicious transactions.) Stripe uses machine learning and an algorithm to identify potentially suspicious transactions. Merchants can deny the transaction or override and approve it. However, it’s usually on the merchant to go in and enable these tools and monitor closely.

That said, brick-and-mortar businesses should also take steps to protect themselves. This includes basic steps such as checking IDs and avoiding keyed transactions wherever possible.

Many processors will deem you an unacceptable risk and simply terminate your account if they find that you have a high level of fraudulent transactions, so keeping those transactions (and chargebacks) to a minimum should be one of your top priorities.

7. Keep Documentation

Chargebacks can happen up to 180 days after the date of the purchase, and in legal agreements, reserve accounts can be held up to 180 days or more for chargebacks, warranty claims, or return requests. This is why to protect your business, you should keep records of transactions at least six to nine months after they’re settled. Such records include batch data, signed invoices/receipts, contracts, or similar showing the transaction actually took place and was completed.

This data is especially important to keep for large transactions, as it proves that the customer agreed to the transaction and reduces the risk of chargebacks. If you’re accepting a transaction that is well outside your usual size or scope, one way to make sure you have a record is to create an invoice and get everything signed.

Keep the documentation in a place where you can quickly access it (but secure enough that not just anyone can access it, too). If you get a chargeback notice and decide to fight the chargeback, be sure to send the documentation back to the processor as quickly as possible, in as complete a form as possible.

8. Communicate With Your Processor

By communicating, we mean communicating before anything has gone wrong. After all, an ounce of prevention is worth a pound of cure.

So, before you accept a significantly larger than usual transaction, you might wish to speak to someone in the fraud department of your processing company. You might have to provide the invoice information and other details about the transaction, but with this information, you could get pre-approval for the sale. This way, when it comes time to run the payment card through the network, you can prevent holdups.

If you’re fortunate and are growing your business fast and see your transactions and volume increasing, you can talk to your processor about increasing your limits to reduce the potential for holds.

The Bottom Line On Merchant Account Holds & Freezes

It’s best to take a preventative approach to merchant account holds and freezes to avoid cash flow disruptions to your business. Make sure you are clear from the outset what level of business you expect to do and what limits your processing agreement puts on you.

Frequent, clear communication with your processor is going to be essential, especially if you have a dedicated account representative.

Always let your processor know when you are making changes to your business. It also doesn’t hurt to have a third-party processor/payment service provider like Square or PayPal as a backup account in case anything does happen. If your primary account is frozen, you can switch over to the backup to get you through until the matter is resolved.

Since the top payment processors for small businesses don’t make a habit of enacting unnecessary merchant account holds or freezes, doing your due diligence when it comes to choosing a payment processor offering merchant services can help secure your business cash flow in the long run.