How to Avoid Merchant Account Holds, Freezes and Terminations
Nothing 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.
Table of Contents
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 credit card 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
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26 Comments
Hello,
Wonderful information you have provided. In respect to holds and freezes, is there a processor that is better to work with to prevent this situation? Looking to move to a new merchant processor and don’t need any issues like you mention here.
Thanks you…………..Stuart Wright
I have a couple of questions for you. I have been involved with 3 Merchant accounts during the months of 9/2016-12/2016. Each continued to raise the reserve and then terminated the contract because my partner and I took to long to get them the reserve funds. None of the Merchant accounts processed any of the credit cards and expected us to pay them the reserve in advance. I thought they usually took the reserve monies out of the charges and then paid the merchant. That was not the case with all 3 of these Third Party processors. Between the 3 of them thy are holding 50K of our monies and repeated calls to them to return our monies fall on deaf ears. What can be done to get them to return our monies? Will we have to take legal action to get them to cooperate? Meanwhile I have 200K of unprocessed charges and the business or what’s left of it is in serious jeopardy. Please provide your thoughts and is this typical for the industry?
Tom, we’d recommend speaking with a lawyer. Best of luck to you.
What Happens when they start an Investigation, shut down your Merchant account because you went over your monthly amount(suspect fraud)?….they do not have any batch funds but hold your money with your institution….you have never had any chargebacks….will the money be returned?
What are your thoughts on keeping a mobile payments account separate from everything else? I was also taught a best practice is to keep mobile as their own lane.
I really liked the article but would like a bit more specific advice.
I was considering using super swipe payments for a high risk business and would really like to know if you have prior experience with them? superswipepay.com is there website in case you can’t find it.
Thank you in advance. I would also appreciate any good suggestion for a pharma business.
Hi Hocem,
For high risk, I would recommend taking a look at Durango Merchant Services, Payline Data, and Instabill.
Any experience with a nonprofit accepting donations? We use fund accounting and need to capture the fund that should receive the gifts in Quickbooks. Or should we go through our merchant account at QGiv?
Hi Anne,
Thanks for your question. I’m familiar with nonprofits accepting donations, but I’m not sure exactly what you’re asking. If you’re wondering how to handle fund accounting in QuickBooks, you can find a guide here. I hope this helps but if you need more information, can you explain your situation–and your query–in a bit more detail? Thanks!
Worst of all merchant services company, if you call customer service with your statement, the person want statement number. You end up spending reading all account numbers. Most CSR’S answering the phone has no clue about account number on the statement. Unbelievable bureaucracy. I sold my business, I cannot make them to close account. I have tried five times so for. Stay away from these hard core bureaucrats. Shame on there management. They think as a small business person you can not do any thing
Ok my friend deposited 2,500 into my account Tuesday then Wednesday he back door and deposit 3,000 into my account I took the whole 3,000 out my account and everything was good until my ball called me and said come back we need you to sign for it , I’ve never had to sign anything just the deposit slip for getting the money out that’s it I’m honestly scared cause I’ve never been put in the theft category but he sent the money to me how am I suppose to know it’s a scam or so I trust him so that’s just completely out of my mind that he would set me up I need answers on what tobe aware of when I go to the bank in the morning ?? Please I need to know now
What if someone has multiple merchant accounts under other people names? Can it be a reason for termination? I know that people have multiple MIDs to avoid monthly limits with auto-billing
Hi, I hope someone can help me because I a thoroughly frustrated. I have been working for this online company for over a year and our payments are processed through this company. I have yet to be paid and every time I call they give me a different excuse. First it was because they came under new ownership then it was jus an accounting error,then they had my bank account information wrong and now they keep giving me different days they sent my payment out and its direct deposited!! I have spoken to my boss and he keeps telling me that he has had problems with them in the past and he should go with a different company, but I’m like, where is my money? you are getting yours money, I just want the money I worked hard for. I have recurring subscribers to my site but no payments and I don’t know what I can do to rectify this.. What are my third party rites? We don’t seem to have many rights. I have had to loose my lights and phone for a while waiting for this money. I’m not able to work an outside job because of chronic pain so this is it for me. Please help me to get ideas what to do. One time I spoke to the company and they hung up on me then they deleted previous emails to my account telling me when they were sending out my money! This is clearly a crooked company. Or perhaps they do not care because they are getting paid. Clearly my boss doesn’t care because they are paying him on time.
Hi Ereka,
It sounds like you don’t have a direct relationship with the payment processor, so unfortunately this falls out of my area of expertise. But I can tell you that the payment processor itself will never hold your funds for more than 180 days, usually not more than 90. It sounds like some other third party is failing to make the deposits. You probably have some kind of agreement or contract that outlines your rights, so you might want to refer to that to see what the standards for holding funds are. In these situations, the squeaky wheel gets the grease. So make complaints (the BBB is a good place to start), make a fuss, make phones calls. A year is way to long to wait to get paid. I hope they get this fixed for you ASAP. Let me know the name of the company that has the money and I’ll let you know if there’s anything else I can think of to do.
hi I need to know is there a way to accept cards and not have a middle man holding my funds cause im thru with paypal and these merchant provider don’t sound like an help cause I refuse to ship product without clear payment thanks
Ahmad,
Can Amazon hold my money forever, that is what they are telling me.
I had the payment account for 4 years and I left 8300.00 dollars in the account for 3 years without touching it, I tried to close my account first, 2 months ago and I received an email asking me the reason I want to close my account, then 3 days later I received another email that say we will close your account and we will hold your funds indefinitely. This account was not used the past 3 years. How can I get my money back from them or If you know any attorney that can help me to get my funds back from these MAFIA(Amazon) corp. They do not even respond to my emails.
Thanks,
Tova
Hi Tova,
It is certainly not legal for the company to hold the funds indefinitely. But they may want to thoroughly confirm that you are who you say you are before releasing the funds, especially given that the funds sat in the account for so long. Reach out to customer service by phone. I think that there is a part of the story that you have not been provided with yet. If the payments are old, then the funds have already cleared. So there is no risk of chargebacks. But if they cannot properly confirm your identity and the account is close, Amazon will have to surrender the fund to your state’s Unclaimed Funds office and you will have to submit the proper paperwork there in order to get your money.
From a business perspective, reducing credit card fraud starts with the human element – specifically – with comprehensive security awareness training. While companies often spend untold sums of money on the latest and greatest hardware and software products, they fail to recognize the importance of training and educating employees on security issues, threats, and best practices. There are a multitude of programs available online, many for free, so there’s really no excuse. Want to stay in business, then protect cardholder data by training your employees on important security issues and threats – it’s really that simple.
From a personal perspective, individuals just need to be very careful as to who they give their cardholder data information to, and watch out for fraudulent charges, which means reviewing monthly statements and looking for any anomalies
As the owner of a small business I need vendors that help me grow. I have been “caught” twice selling more than my limit. This limits the growth of a company and it very disruptive. It also tends to happen when cash flow is an issue (because I purchase more to support big orders and then I don’t get paid because my sales are not funded). It is the mark of an arrogant and unsupportive industry. Credit card processers are truly sharks. They are expensive, service is poor and they tend to be unreliable. Then they hurt their customers when they are needed the most – terrible industry. Despicable
Hi
My name is Robert. What I have not seen on any of these posts is anything about merchants protecting themselves from the processors.
I have a friend that had 49k in a reserve account. The processor files bankruptcy and after a long drawn out ordeal of almost 2 years, received 3900.00 settlement from the bankruptcy court. Later it was found out that they were being sued and had to file for bankruptcy protection.
Oh how the world work….
Thanks,
Rob
Hi Rob,
That’s a nightmare. The best way to avoid that sort of thing is to (a) avoid having funds held in a reserve account if at all possible (sometimes it’s unavoidable), and more importantly (b) work with the most reliable merchant services provider possible. All of our favorite processors are highly, highly, HIGHLY unlikely to go under. They are reliable companies with long track records that we have carefully vetted. Working with a reliable partner is the best way to minimize risk of this kind of catastrophe.
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
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
Hi I need a reliable merchant account any advice ??
Hi Sam,
Check out our comparison chart to see some of our favorite providers! Any questions, don’t hesitate to ask.
Good luck,
Tom
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.