Merchant Account Holds and Freezes
An extremely important but seldom talked about topic in credit card processing is merchant account holds. One of the most financially devastating things that can happen to a business is for a processing bank to freeze your merchant account.
If this happens, you won't be able to access the account and your funds from open authorizations will be held without deposit for an undisclosed period of time. This means that you can't accept new credit card transactions and the income from recently processed transactions will not be deposited for days, weeks, or longer.
- What causes merchant account holds?
- When a Processor Suspects Fraud
- What do I do if my merchant account is held?
What causes merchant account holds?
Suspected fraud is often the basis for a processor to put a hold on a merchant account. Most of the time, processors are the second line of defense against credit card fraud, behind a business. Less commonly, if someone opens a merchant account with the intention of using it to defraud cardholders, processors become the first line of defense against fraud. Holds are imposed so that the processor can investigate potential fraud and protect cardholders.
There are two basic reasons that cause a processor to apply a hold to a merchant account. The first is breaking terms agreed upon in the merchant service agreement. The second is suspicious processing behavior.
To open a merchant account, you must first sign a merchant service agreement. This agreement outlines the rules, fees, and limitations regarding processing volume and average ticket size for your account. If you break any of the provisions in your merchant service agreement, the processing bank can hold or even terminate your account. In the case of an account being held, it will be unusable for as long as it takes the processing bank to investigate the breach of the agreement and make a ruling on whether to reinstate or terminate the account.
Common reasons why you may be found in violation of your merchant service agreement include:
Chargebacks are taken very seriously by processing banks, and excessive chargebacks are a leading cause of merchant account holds and closures. A common misconception regarding chargebacks is that if they're won they don't count against you. That is simply not the case. Win or lose, a chargeback is a chargeback, and too many will lead to your merchant account being held or closed.
Processing in Excess of Declared Volume and Average Ticket
When you apply for a merchant account, you have to declare your business's average monthly processing volume and your average ticket. Many people forget about these numbers once they start accepting cards, but processors don’t.
These two figures are far more than a formality. Processing in excess of your declared volume or average ticket can lead to your account being held or terminated. It’s important to declare your processing amounts correctly and be familiar with merchant account processing limits and average tickets. If your processing volume or average ticket changes significantly, it's a good idea to contact your processor.
Using a Merchant Account to Accept Payment for Undisclosed Goods or Services
Merchant accounts aren't a free pass to accept credit card payments for whatever you're selling on a particular day. When you apply for your merchant account, you provide a basic description of the goods or services that you're selling. Using the account to accept payment for anything outside of this description violates your agreement and may cause a hold or termination of your account.
Additionally, some merchant agreements prohibit the sale of certain items or services. Some of the most commonly prohibited are pharmaceuticals, firearms, digital goods, travel services, telemarketing and more. Aggregators - like Square, Stripe, and PayPal - in particular keep public lists of prohibited business types. Some business owners sign up anyway, assuming that they're too small for a big company to catch. However, even aggregators with a faster sign up process often catch on, and when they do, they'll freeze or close your account.
Using a Merchant Account to Accept Payment for Other Businesses
Merchant accounts are issued to individuals or businesses for use by that party only. Using the account to accept payment for another person or business, sometimes called credit card factoring, is strictly forbidden. Once discovered, this behavior will almost certainly lead to account termination.
Related Article: Understanding Credit Card Factoring.
Suspicious Processing Behavior
Suspicious processing behavior is another leading cause of merchant account holds. Holds for this reason are especially difficult because they’re typically applied by the processing bank without notice. Businesses only usually realize that their account has been held when they try to charge a credit card or when they stop seeing deposits from credit cards sales.
Avoiding behavior that will trigger a processor’s fraud alerts can help prevent holds. There are a few guidelines for avoiding suspicious processing behavior:
Contact your processing bank's risk department, not your sales representative, before running unusually large transactions. Attempting to process a single large transaction beyond what is normal for your account will almost certainly lead to a hold.
Keep your processor informed of changes in your business that will affect your processing behavior. One common change is carrying higher cost items that will increase your average ticket. For example, if a bait shop that has been selling only small bait and tackle items for years begins to sell deep sea fishing equipment, their average ticket that was previously $15 may spike to $500 or more overnight. This drastic change may lead to the processing bank holding a merchant account until the reason for the ticket increase can be investigated.
Notifying your processing bank of changes in your processing behavior will allow them to adjust the ticket and volume figures for your account before there's an issue.
When a Processor Suspects Fraud
Processors are obligated to take action against fraud and continually monitor all of their business clients for signs that a merchant account is being abused. If indications of fraudulent activity are detected, the offending merchant account will be held while an investigation is conducted to determine what triggered the alarm. Such investigations result in either the release of the merchant account hold or the termination of the account.
If an investigation ends with the termination of a merchant account, additional actions may follow depending on the reason for the account closure. In the case of deliberate misuse or fraud, the offending merchant may be added to the terminated merchant file (TMF), face fines, or even have criminal charges brought against them.
These fraud detection systems serve a vital purpose in the fight against fraud but they're not perfect. Sometimes innocent merchants have their accounts flagged and held.
What do I do if my merchant account is frozen?
If your account does end up getting frozen with funds held by your processing bank, there's not much that you can do except let the process run its course and cooperate with your processor. The processor will need to conduct their investigation and this will take time. In extreme cases where the cause of the hold is not deliberate and a substantial amount of funds are being held, you may wish to seek legal counsel from an attorney that specializes in bankcard law.
Remember, the best defense against merchant account holds is a good offense. Be aware of your processing agreement terms, and limit any suspicious processing behavior to help avoid triggering your processor’s fraud alerts.