How to Avoid Merchant Account Holds, Freezes, and Terminations
Nothing can bring your business to a screeching halt quite like a hiccup in your payment processing flow.
Whether it’s withheld funds, a freeze on processing ability, or the complete termination of your account, these scenarios are a nuisance at best and devastating at worst.
We’re here to explain the main reasons why processors hold funds, freeze accounts, or terminate an account entirely. We’ll also look at ways to prevent this from happening so you can keep your cash flowing and your business on solid footing.
Table of Contents
- Know Your Terminology: Hold vs. Freeze vs. Termination
- How to Avoid a Cash-Flow Crisis: 6 Steps to Success
- What Happens If You Encounter a Hold, Freeze, or Termination?
Know Your Terminology: Hold vs. Freeze vs. Termination
I’m convinced that few industries are as lax about their use of technical terms as the payments industry. As a result, it’s fairly common to see some terms used interchangeably or incorrectly. Worse, you might see two phrases used to refer to the same thing. So let’s start with defining each of the three terms we’re discussing here.
Withheld Funds (Hold)
A hold on funds refers to a processor withholding some of a merchant’s processing volume and storing it in a separate fund as a protective measure in the event of chargebacks, refunds, or fraud. Holds can be applied to individual transactions (usually high-value or very suspicious ones) or to a total percentage of the merchant’s business.
The latter is usually referred to as a “reserve fund” or simply a reserve. A “rolling reserve” is when a processor chooses 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 on an ongoing basis. This happens over and over, hence the term “rolling reserve.” 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.
A hold may be implemented concurrently with a processing freeze (see below), but not in every case.
Simply put, a processing freeze is when the processor temporarily shuts down a merchant’s payment processing abilities. A processor may use a freeze to analyze a merchant’s processing habits and decide whether the merchant has met the terms of the agreement, or decide whether adjustments to the agreement are necessary. This may result in the implementation of a reserve fund. Unlike a termination (coming up next), a freeze is potentially temporary.
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, or if the merchant has misrepresented their business in the application process.
Now that you know what each of these terms means, let’s take a look at how you can avoid encountering any sort of hold, freeze, or termination.
How to Avoid a Cash-Flow Crisis: 6 Steps to Success
Regardless of which type of processor you choose, the best steps to prevent holds, freezes, or terminations are fairly universal. So without further ado, let’s get to it!
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 call a high-risk merchant account. We’ll take a look at all three of these option to help you should decide which is right for you before you set out to get any sort of account.
Option 1: Direct Agreements
Traditional merchant accounts are direct agreements that create a unique account solely in your name. This includes large companies such as First Data or Vantiv, as well as smaller ones such as Helcim or Dharma Merchant Services. With these accounts, you are the merchant of record. Your terms are often negotiable because they are catered to your processing history and industry type.
When you apply for an account, underwriters review your business thoroughly before making an offer. As a result, merchant accounts, on the whole, offer a high degree of stability. It might take a bit of back-and-forth before you can open the account, but the process has certainly been streamlined in recent years.
Merchant accounts are often best suited to well-established businesses that are doing consistent business. It’s usually the most cost-effective option when you process above $10,000 a month (and sometimes even above $5,000 a month). If you’re not as well-established or you only make sales infrequently, third-party processing might be a better solution.
Option 2: Third-Party Processing
Third-party processors lump individual users into a single large merchant account, which is why they are often referred to as “aggregators.” This includes Square, PayPal, SumUp, Stripe, and even Etsy. In these agreements, the processor is the merchant of record. Because of that, these processors do not do as thorough vetting, which allows them to open accounts almost immediately.
The tradeoff is that, because little vetting is done in advance and there are few (if any) minimum requirements, you are subject to much greater scrutiny afterward. Third-party processors are well-known for their tendencies to subject merchants to holds or terminations. It bears mentioning that nearly all aggregators have terms of service that allow them to implement holds or terminations at any time, for any reason or no reason at all.
However, for low-volume or infrequent businesses, this is usually the most cost-effective solution because most third-party processors have no monthly fees and charge a consistent percentage rather than a percentage and transaction fee. The fact that many of these processors tend to be mobile-focused — that is, they are primarily mPOS apps meant for on-the-go use — also makes them well-suited to businesses without a physical location for those that travel to conventions or trade shows frequently.
Option 3: High-Risk Merchant Accounts
High-risk merchant accounts are just a special breed of direct agreement. Some of the processors that provide standard merchant accounts will offer high-risk accounts as well. Other companies choose to specialize solely in high-risk accounts. So what makes you a likely candidate for a high-risk account?
For the most part, being deemed “high-risk” isn’t a personal slight; it rarely has anything to do with your qualifications as a merchant or business owner. It’s mostly a matter of your business model or industry. Antiques, collectibles, financial services not provided by a bank, many types of brokering services, anything related to adult entertainment, and most cigarette- or e-cigarette-related businesses qualify as high-risk. Check out our article on high-risk merchants for a far more detailed list of industries usually deemed high-risk.
High-risk accounts offer a LOT more stability to high-risk industries. For one, you’re much more likely to get approved for an account. Second, there’s a much lower risk of encountering an unexpected hold, freeze, or termination. The increased stability is a trade-off, however. In exchange, you’re going to pay higher rates than you would with a traditional merchant account or a third-party processor. Furthermore, your processor may require a minimum reserve or a rolling reserve as a condition of even opening the account.
2. Set Expectations and 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 do 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 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 third-party processors 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 third-party processors.)
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 an $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 tractions you expect to do and then stick 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 an account termination, period. 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.
Why does that matter, though?
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, which means it directly affects what you pay per transaction. (Check out our Complete Guide to Credit Card Processing Rates and Fees for more information on fees.)
Not only that, but if you’re expanding your services, or reshaping your brand to move into a new industry, you need 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. 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 give the appearance of something inappropriate. It could also affect your processing limits, giving your processor the appearance that you are exceeding them.
Not only that, but it will 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 awhile 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 start to get 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 a termination.
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 e-commerce merchants. To keep your chargebacks to a minimum, 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. Check out our guide on how to prevent chargebacks for more advice.
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 e-commerce 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.
Another major component to protecting your business against fraud is switching to EMV acceptance. On October 1, 2015, a new regulation came into effect that puts the liability for accepting fraudulent transactions on the least-secure party. Considering the overwhelming majority of consumers have chip cards, it’s definitely time for more merchants to switch over to EMV.
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.
What Happens If You Encounter a Hold, Freeze, or Termination?
It’s quite possible that you might not know you’re facing a hold, a freeze, or a termination until you try to process a transaction but can’t, or your bank account statement doesn’t match your sales records because your money is being held in a reserve fund. Not all processors give advance warning — they’ll simply take what measures they deem appropriate and notify you afterward.
That’s why it’s very, very important that you keep a close eye on your merchant account and any correspondence between you and your processor. Read your monthly statements and make sure you’re not violating the terms of your merchant agreement.
But let’s say it does happen: Your account is frozen. What now?
Unfortunately, there isn’t much you can do. Provide any documentation that your processor asks for (invoices, purchase orders, etc.) as quickly as you can. Let everything run its course. Either your processing agreement will be reinstated (possibly on the condition of a reserve fund), or it won’t, and you’ll face a termination.
If you are fortunate enough that your account is reinstated, make sure that you are very clear on the guidelines and what you must do to prevent any future problems.
If your account is terminated, you’ll need to look for a new processor. In all honesty, you may find that to be challenging. Processing freezes and terminations look bad on your record. In the case of a termination, your name will be added to the terminated merchant file (TMF). This lets other processors know that you have had your account termination, which makes it more difficult to obtain another merchant account.
Ultimately, that means your best course of action is to avoid a hold, freeze, or termination in the first place. 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. Make your account representative your best friend — and if you don’t have a dedicated account rep, don’t hesitate to get on the phone with customer support if you have any questions. Always let your processor know when you are making changes to your business.
It also doesn’t hurt to have a third-party processor 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.
I hope this has helped! If you need more resources, I recommend checking our Merchant’s Guide to Getting Funds Fast. If you’re ready to start looking for a credit card processing company, check out our top-rated merchant accounts as well as our top-rated mobile payments!
Got questions? Leave us a comment! We are always happy to help.