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
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.
Processing Freeze
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.
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, 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.
Melissa Johnson
Latest posts by Melissa Johnson (see all)
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- How Much Does Square Charge? - August 11, 2017
- The Merchant’s Guide to Getting Your Funds Fast - August 7, 2017
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.