Merchant Account Closed – Now What?

It goes without saying that abruptly losing your ability to accept credit cards can be majorly disruptive. With many consumers choosing to pay by card and still many others not even carrying cash, cards are a key factor for today’s business owners. Let’s take a look at what causes processors to freeze or close your account so you can do everything to avoid it.

Freezes, Holds, and Closures

Firstly, it’s important to understand the difference between three types of ‘pauses’ on your processing:

Freezes are full pauses on your merchant account. You can’t accept new transactions and you won’t receive funds from recently accepted ones until the freeze is released. Freezes may happen when the processor suspects fraud or other issues with multiple transactions.

Holds are pauses on specific transactions. Your processor will delay depositing the funds from those specific transactions due to concerns about fraud or for other reasons. You can continue to accept new transactions and will receive funds from any transactions not on hold. Since this is a response to specific transactions and does not prevent you from accepting cards in general, holds are not the focus of this article. You can read more in our article on merchant account holds.

Closures are the termination of your merchant account. You are typically entitled to the funds from completed transactions, though they can be frozen or delayed if there is suspected fraud. But you can’t accept new transactions and your account is considered to be inactive and closed with the processor.

What causes account freezes or closures?

There are a number of possible reasons that a processor may close your account, including:

Excessive Chargebacks

The standard threshold for ‘acceptable’ chargebacks is less than 1% of your total transactions. If your chargeback rate starts creeping up, it will alarm your processor, who will freeze or close your account. Chargebacks alarm processors because they indicate unhappy customers at best or fraud at worst. Unhappy customers may get their money back from the bank, but the bank gets the money back from the processor. If the processor can’t get the money back from your business, they will be out of luck and have to eat that cost. Processors aren’t eager to lose money, so chargebacks are an area of concern for them.

High-Risk Industries

On their own, businesses in high-risk industries won’t automatically lose a merchant account. However, high-risk businesses that don’t disclose that they’re in a high-risk industry, or try to mask it as a lower risk business, face account closure without warning.

Sometimes owners of high-risk businesses unknowingly sign up with a processor that doesn’t support high-risk. This is especially true for businesses that aren’t familiar with what industries are considered high-risk, or businesses that don’t know that all processors don’t accept high-risk businesses.

For example, many health supplement companies are considered to be “high-risk.” Payment processors like Square don’t support health supplement companies. But if you’re the owner of a health supplement company and don’t know that your industry is “high-risk” or you don’t know that Square doesn’t support health supplement companies, you might sign up with Square. You’ll likely even get through the initial setup and may begin taking cards, because Square doesn’t do upfront underwriting due diligence. However, later on they will likely realize it and close your account due to being a prohibited business type.

In other cases, a business owner may know they are considered “high-risk” but are frustrated with the increased cost or reduced choice in processors that comes from being in a high-risk industry. This is especially true of businesses that work hard to keep their chargebacks low and abide by the rules, but are still considered high-risk because of the industry they’re in. For those businesses, it may be tempting to sign up with a processor claiming to be a lower risk retailer. It’s never a good idea to go this route, as it can lead to fines, and of course, closing your merchant account.

Read more about high-risk credit card processing. Some business owners are surprised that high-risk industries aren’t just things like tobacco or firearms, but can include travel agencies, tech support, and more.

Sudden Changes in Processing

Anything that seems out of the ordinary for your processing history will cause additional scrutiny, as it can indicate fraud.

If you normally take credit cards only within the United States but start doing a lot of international transactions, your processor will likely freeze your account to investigate and ensure it’s not fraud. Or if your average transaction is typically $20-30 but suddenly your transactions are all $100+ you may see a freeze while your processor looks into it.

Avoiding Freezes and Closures

The good news is that there are simple steps you can take to greatly reduce your chances of unexpected account freezes or closures.

Minimize Chargebacks

It’s always a good idea to work to minimize chargebacks, as it will keep your costs down and mean happier customers. But it also has the benefit of lowering your chances of a chargeback-related account closure.

To minimize chargebacks, be sure to:

Make sure of fraud prevention tools, including Address Verification for online transactions.
If you make it harder for unauthorized transactions to occur, you’ll have fewer situations where customers initiate chargebacks due to a transaction they didn’t make.

Have user-friendly return policies if possible.
For purchases a customer did make but is unhappy with, be prepared to work with the customer to make it right. If worse comes to worst, refunding the customer proactively can prevent a chargeback.

Keep documentation for the chargebacks you do get.
Chargebacks will happen to all businesses at some point. Be sure to respond promptly to any requests for information and provide as much documentation as possible, especially if there are contracts involved. If there are no contracts, providing receipts, reports showing use of anti-fraud tools, or customer communication such as emails can help.

Understand High-Risk Options

It’s important to know if your business is considered “high-risk.” The classification is usually not personal – it relates to overall industry trends for the industry your business is in. You can check our article High Risk Credit Card Processing for more details.

Once you confirm that your business is considered high-risk, be sure to:

Find a processor that explicitly accepts high-risk businesses.
Don’t fudge the details about your business to get a merchant account with a processor that doesn’t accept high-risk. They will find out eventually, and you’ll lose your account without warning. Furthermore, you could be put on the Terminated Merchant File (TMF) list, which would prevent you from getting another account.

Keep Your Processor Informed of Big Changes

As I mentioned previously, anything considered out of the ordinary for your business will raise a red flag with your processor. In some cases, unusual processing activity indicates fraud, so your processor will look to avoid that. However, there are plenty of times when changes in your processing profile are normal. Perhaps your business brought in a new premium product line with higher costs, or has switched to a seasonal sales model where you close for part of the year.

Keep in mind what your “typical” processing looks like and if you plan to vary it significantly:

Contact your processor.
Let your rep know in advance that you have been processing with them and explain your typical situations and what you’ll be doing differently. If you’re adding website processing when you’ve historically been a brick-and-mortar only location, they’ll need to know that. If you typically have small average transactions but expect it to go up significantly due to new product lines or new clientele, that’s good information to share with them. If you plan to significantly decrease hours or close for part of the year, they will need to know that too.

Actively keeping your processor in the loop will help avoid concern over shifts in your business model or processing. Note that processors won’t typically be concerned about steady growth and small fluctuations of transaction size or quantity. It’s not necessary to let them know every time you get an out-of-the-ordinary large sale.

Signs Your Account is At-Risk

In some cases, you do get warning that your account is in danger of being frozen or closed. The main one is any alerts of high chargeback volume. You should contact your processor immediately if you get a notice from them or from your chargeback management company of high chargeback rates. Working with them to reduce your chargebacks and put measures in place to prevent continued issues will go a long way to keeping your merchant account active.

Your Merchant Account is Frozen or Closed – Now What?

If your account is frozen or closed, you will get notification from your processor, often a letter. You may have also noticed issues with your account if you tried to process cards.

If the letter or notification had details of why your account was closed, read through that carefully and determine if any of it is a mistake or inaccurate in some way. If it’s unclear, you will need to call your processor for clarification.

In the meantime, it’s a good idea to notify customers as soon as possible that you’re having a temporary disruption and can’t accept cards. Request that they pay with cash if possible. For businesses with recurring billing or subscription services, consider the timing for informing customers of potential delays in processing their subscriptions. Be sure to give enough warning and reassure them that you are working to resolve the issue as quickly as possible.

Appealing the Freeze or Closure

Generally, there’s not a lot you can do to push along your processor’s investigation. However, you can attempt to appeal. If you have documentation to contradict the reasons that your account has been frozen, collect that evidence. For example, if the freeze is due to excessive chargebacks but you recently implemented fraud tools for your ecommerce site or wrote a new refund policy, these can help processors feel more comfortable.

Write an appeal letter acknowledging the issues laid out in the suspension letter and explaining any steps you have already taken to correct the issue, along with your evidence. If you are implementing additional steps in the future, be sure to detail those. Explicitly ask for reconsideration of your account freeze and if there are any other steps you would need to take in order to make that happen.

Submit the letter and your supporting documentation to your processor, and follow up. In some cases, your processor may be willing to reinstate your account.

Note that freezing or closing accounts is within your processor’s control and they don’t have to reinstate your account. It’s a little more likely that they will reinstate a frozen account than a closed one, but they don’t have to do so.

Account Closures with Square and Other Aggregators

Some payment processors, like Square, are not actually full “processors” themselves, but aggregators. Essentially, they have a merchant account and “sublet” their account to other businesses. For this reason, aggregators are often among the quickest to close accounts that seem suspicious or concern them. Business owners regularly report little success attempting to get Square to reopen a closed account, even if the owner believes the account was closed in error. If your account closure is with Square, it may not be worth the time to put together an appeal.

Choose a New Processor

Unless your business gets put on the Terminated Merchant File (sometimes called the MATCH list) you can look for another processor and get a new merchant account.

If taking cards is critical, as it is for most businesses, you may want to pursue this route immediately and skip the appeal to your current processor.

However, don’t let the time-crunch force you into a bad decision or a processor that won’t serve your business well. You can utilize services like CardFellow.com’s free processor comparison marketplace to see real quotes from multiple processors very quickly while benefiting from the safeguards CardFellow puts in place.

A frozen or terminated merchant account is stressful, but doesn’t have to be the end of your business. You can try working with your current processor to resolve the issue or take the opportunity to change to another processor. Whichever path you go down, be sure to take steps with your new or unfrozen account to take cards in accordance with your processor’s policies to avoid the same issue in the future.