How to avoid Merchant Account Terminations, Freezes and Holds
For any business that accepts credit and debit card payments, keeping the transaction processing pathways clear is just as important as making sure the front door of a brick-and-mortar shop unlocks in the morning. If your customers can’t make purchases, you don’t make money. Understanding the snags that can interfere with the smooth operation of your payment processing is critical to learning how to avoid them and ensuring your business’s financial stability.
There are three types of disruption that can get between you and the money in your merchant account, and unfortunately the terminology used to refer to them often gets jumbled, potentially confusing a merchant already worried about trying to get his or her account untangled. Given the stakes involved for their customers, one might imagine that the payment processing industry would try to be as consistent as possible in the jargon they use to describe account problems, but despite the lack of agreement, we can clarify the meaning of some of the terms that are used.
If a hold is placed on your merchant account, it means that some portion of the funds contained in it are being withheld. These funds still belong to you, but they are being stored separately as a guarantee against the possibility of fraud or chargebacks. A hold might be placed on specific transactions that raise red flags with your processing company because they are unusually high-value or otherwise suspicious in some way. Alternately, a certain percentage of your total transaction volume may be held for a set period of time as a precaution against risk. This kind of hold is referred to as a “reserve fund,” and may take the form of a fixed dollar value (termed a “minimum reserve”) or a cut of each day’s transactions. In the latter case, the day’s held funds will be kept in reserve for a predetermined period of time, after which they are released and replaced with the next day’s held funds. This type of hold is a “rolling reserve,” as the held funds cycle through on a continuous basis. In all these cases, if no suspicious activity is discovered and the transactions clear normally, the held money will eventually be released to your business as described in the terms of your merchant account contract.
A payment processing company can freeze a merchant’s ability to accept payment card transactions through their merchant account, preventing any new transactions from being initiated for a period of time. An account freeze may be implemented in response to concerns of suspicious activity or because the processor wants to investigate whether the merchant has violated the terms of their account agreement. A freeze can create a major disruption in the operation of a business, as it prevents the merchant’s customers from making purchases with their credit and debit cards, but if the outcome of the payment processor’s investigation is satisfactory, the freeze may be lifted and transactions allowed to resume. Unfortunately, the final kind of service interruption is much less temporary.
Termination of Account
When a payment processor takes this step, the merchant’s processing account is permanently closed, ending their ability to accept card transactions through the processing company. The business owner must try to open a new merchant account elsewhere in order to accept card payments. However, finding a company willing to offer a new account to a business that has suffered an account termination is difficult; most processors share a terminated merchant file (TMF), warning other processing companies about merchants that have had their accounts closed. This kind of reputation is hard to shake, and if a once-terminated merchant is able to open a new account at all, the terms are likely to be very unfavorable. Whenever possible, it’s best for a merchant to avoid freezes and terminations altogether.
Possibly the most reliable way to avoid complications with your merchant account is to ensure that you choose the appropriate type of processor for your business at the outset. There are three options to consider when seeking to open a merchant account, and selecting the right fit for your business will help you avoid a great deal of difficulty and potential conflict with your payment processor in the future.
This is the classic model of a merchant account, of the sort that businesses have used for decades. It’s a directly negotiated contract between the business owner and the financial institution or company that processes the credit transactions. The account is applicable to a single business only, and the terms are often tailored to the individual business’s processing history or expected volume and the type of industry the business operates in. As a result, these accounts generally come with fairly favorable terms and a high level of stability for the merchant, though the agreement may take longer to finalize; the processing company needs to conduct a thorough review of the nature and history of your business before reaching a conclusion. Even so, the process of opening an account has become much less arduous than it has been in the past.
In general, ideal candidates for a direct agreement with a payment processor are businesses that have some measure of established history and can expect a predictable, consistent stream of transactions totaling at least $10,000 each month. Newer businesses or those with more sporadic patterns of sales may be better served by looking into third-party processors (described below).
High-Risk Merchant Account
While they are properly a subset of direct agreement merchant accounts, it’s worth discussing high-risk accounts as a distinct option due to the way processors handle them. Some processing companies specialize exclusively in offering high-risk merchant accounts, while others offer them alongside more standard direct accounts.
Despite what the term might suggest, being classified as a “high-risk” merchant generally has nothing to do with any question of your own credit rating or reliability, and everything to do with the business model you operate under or the kinds of products and services you sell. By their very nature, some industries are more vulnerable to chargebacks and fraud than others, and processing companies take that risk into consideration when evaluating a business for a merchant account. If your business sells collectibles or antiques, large-ticket items, cigarette or e-cigarette products, or any sort of adult entertainment, or if you offer brokering services, financial services outside the umbrella of a bank, or services targeted toward customers with poor credit, you can expect to be dropped into the “high-risk” category before the processor’s agent even looks at your business history.
Being classed as a high-risk merchant isn’t necessarily a bad thing. If you’re operating in an industry that inherently carries a higher likelihood of chargebacks or fraud, a high-risk merchant account is much more stable and reliable than a standard one. Not only are you much more likely to be approved for your account, but the processing company expects more problems to arise with your transactions than they would in lower-risk industries, so you’re less likely to see your account frozen or terminated due to a few chargebacks or some questionable transactions. Of course, there’s a price associated with this leniency. High-risk merchant accounts generally have higher rates and fees than standard accounts, and may carry a requirement that a reserve fund (either a minimum or a rolling reserve) be maintained.
If your business doesn’t process enough transactions in the average month to make an individual merchant account cost-effective, the better option may be a third-party processor. You are likely familiar with a few of these processors already, such as PayPal, Square, and Stripe. When you use one of these companies for credit and debit card processing, the third-party processor essentially acts as a proxy merchant for all the small merchants who use their service, aggregating all of their transactions under the umbrella of a single account in the third-party processor’s name.
There are several clear advantages to this approach to payment card processing. These services require little up-front vetting and you may need little more than a valid email address to obtain an account, which allows you to get set up and begin accepting transactions right away. They are ideally suited for e-commerce and mobile point-of-sale transactions, making them an excellent fit for businesses with a presence primarily online or on the road at trade shows or conventions. In addition, these services generally charge only a percentage fee on each transaction, rather than tacking on a flat per-transaction charge or a monthly fee. This is excellent for businesses with low or sporadic rates of sales, as it keeps your processing expenses predictable and proportionate to the amount of business you do; you never need to worry that a slow month will see all your profits eaten up by processing charges.
Of course, there’s always a trade-off between benefits and drawbacks. In the case of third-party processing, you’re getting ease of access and low fees in exchange for a lack of the stability inherent in other options. The lack of barriers to qualifying for a third-party processing account means that the processor has to take other measures to protect itself from risk. Aggregating processors generally have provisions in their terms of service that allow them to place holds on — or terminate — a merchant’s account at any time, for any reason they deem necessary or without giving a reason. Having the ability to cut a merchant loose at the first sign of suspicious activity mitigates the financial risk taken by the aggregator in placing so few barriers to obtaining an account in the first place.
Choosing the right kind of merchant account for your specific kind of business can go a long way toward avoiding the kinds of snags that can rapidly disrupt your cash flow and interfere with customer relations, but there are a few other important measures you can take to maintain a good relationship with your payment processor and keep your merchant account in good standing.
2. Maintain Predictable Expectations
When you first open your merchant account, you’ll be asked what you expect the average month to look like in terms of transaction volume, and the value of a typical individual transaction. This estimate sets up a baseline expectation for your payment processor, and any significant deviation from it will send up a red flag, alerting them to the possibility of suspicious or fraudulent activity. Because payment processing involves so much financial risk to the companies that provide it, they don’t tend to like surprises, even positive-seeming ones like unexpectedly high earnings; the more predictably your account behaves, the happier your payment processing company will be. (Third-party aggregating processors care less about consistency, but unexpectedly large transactions may still trigger holds or freezes to your account.)
This doesn’t mean that your business isn’t allowed to grow, or have periods of greater success. However, if you expect a change in your average transaction volume or ticket size, either in the long term due to business growth or in the short term from an upcoming sale or convention appearance, you should contact your processing company and let them know that they should expect unusually high activity. (This is similar, in many ways, to informing your personal credit card company of your upcoming travel plans, so the sudden charges from another time zone don’t lead them to suspect identity theft.)
Use Your Account As You Described
It may seem unfair that selling a certain type of product automatically drops your business into the “high risk” category with more expensive rates and fees, and some merchants may be tempted to embroider the truth a bit when describing the products and services their business offers. This will get your account terminated. A merchant that misrepresents his or her business will be found out, their account will be terminated, and they will have a hard time finding another processor willing to work with them.
If your business starts to expand in a new direction or offer a new class of products, reach out to your payment processing company immediately and tell them about this change. Review the agreement you signed with your processor for any provisions related to changing your business. Don’t wait for them to discover that you’re selling products outside of your assigned merchant category code (MCC).
Similarly, if you start a second business or a side project, don’t be tempted to “simplify” things by using the same merchant account to process transactions for both businesses. This could cause you to exceed your estimated transaction volume and may create the appearance of suspicious or inappropriate activity. Instead, open a separate merchant account for the new project, or use a third-party processor for the new endeavor.
Minimize Bad Transactions
Chargebacks and fraud are among the biggest worries of payment processing companies, and high or increasing rates of chargebacks or fraudulent transactions will almost certainly result in having your account frozen and your funds held. As such, you should take all available precautions to reduce your risk of these bad transactions. A chargeback happens when a cardholder contacts their credit card company and disputes a charge made to their account. To make this less likely, offer a simple and easily-viewed return policy for customers unhappy with their purchases, make expected shipping times clear, and save records of transactions in a well-organized system for easy access when needed. Most importantly, keep the lines of communication with your customers open, so they can easily reach out to you with any problems or complaints they have, and you can contact them to follow up on any anomalous activity or expressed concerns. Chargebacks can be contested, especially if you believe them to be fraudulent, but it’s better for both your customer relationships and the standing of your merchant account if you can avoid them in the first place.
Preventing fraud requires a bit more active vigilance on the part of the merchant. Card-not-present (CNP) transactions are particularly vulnerable to fraud, putting a particular burden on e-commerce retailers. Fraud detection tools are a great help in filtering out obviously suspicious transactions and flagging other questionable charges for closer review. As a merchant you have the option to approve or deny suspicious transactions, but it’s your responsibility to monitor them. Card-present transactions are not immune to fraud, and merchants should convert to EMV chip-readers, always check customer IDs and signatures, and avoid keyed transactions.