How to Prevent Merchant Account Holds & Processing Freezes

An unexpected stoppage in your payment processing procedure can be troublesome for a business owner. From withheld funds to processing freezes or account terminations, these instances can be potentially devastating. 

Credit card processing companies put funds on hold for a variety of reasons. If this happens, money received from credit card transactions won’t be transferred to your bank account on time. 

Processing freezes and account terminations are much more serious. These scenarios would prevent you from temporarily or permanently accepting credit card payments through your processor. 

The length of time for held funds or account freezes will vary based on the situation. But it’s best to avoid these scenarios altogether. 

What is a Merchant Account Hold?

Merchant account holds refer to any type of account or agreement in which a processor withholds a set amount or percentage amount of a merchant’s credit and debit card processing sales. Processors use merchant account holding funds to protect themselves against refunds, chargebacks, fraud, and high-risk merchants.

Holding funds can be implemented after a processing freeze or included as part of an initial merchant agreement, depending on the processor, the merchant’s risk, and the merchant’s processing history.

What is a Reserve Fund?

A merchant account reserve fund is a credit card processing term that refers to an account that withholds a certain percentage of a merchant’s processing volume. Some businesses are required to have a reserve fund if the processor deems them to be a high-risk merchant. 

Reserve funds are a type of merchant account hold. Rolling reserves, capped reserves, and up-front reserves are all examples of a reserve fund.

What is Processing Freeze?

A merchant account processing freeze means that a payment processor has temporarily suspended a merchant’s ability to process payments. Processing freezes can last for up to 120 days while the processor conducts an investigation and determines whether to unfreeze the account or terminate the account. 

Alternatively, processors may unfreeze a merchant account with certain stipulations—like a holding fund or rolling reserve. 

7 Ways to Avoid Merchant Account Holds and Processing Freezes

As a merchant, these are the tips and best practices you need to follow in order to prevent payment processing funds on hold:

1. Choose the Right Processor

Not all payment processors are created equally. There are two main types of merchant agreements, depending on the processor you choose.

• Direct agreements
• Third-party agreements

With a direct agreement, a unique account is created specifically for your business, and you become the merchant of record. Direct agreements are the easiest to negotiate since they are designed specifically for your industry and processing history.

The approval process for a direct agreement takes a bit longer because underwriters will audit your business history before drafting an offer.

Third-party processing agreements are set up much faster. Individual businesses are grouped together into one large merchant account. In these cases, the processor becomes the merchant of record. Stripe, PayPal, and Square are all examples of third-party processing. 

A third-party processing agreement is subject to more scrutiny after the account has been created, which can cause funds to be placed on hold. 

Larger and well-established businesses will be better off with a direct agreement. Small and low-volume merchants can get away with third-party processing. Just be aware that the latter puts you at a higher risk for funds on hold. 

2. Avoid Chargebacks

Chargebacks are an inevitable part of running a business. But with that said, chargebacks shouldn’t be taken lightly. 

It’s common for merchants with a high percentage of chargebacks or a sudden surge in chargebacks to have their accounts frozen or funds put on hold. 

The processing company views chargebacks one of two ways:

• The merchant is accepting fraudulent credit cards.
• The merchant is not delivering goods or services as promised to the customer.

Neither of these is a good sign for your business. Too many chargebacks might start with funds on hold, but they can ultimately lead to complete account termination, especially if you have a third-party processing agreement. 

Check out our complete guide on how to prevent chargebacks for more information on this topic. 

3. Prevent Fraud

Fraudulent charges are another red flag for payment processors. Again, these can be unavoidable at times, similar to chargebacks. 

But it’s a poor reflection of your business if you’re continually processing fraudulent transactions. 

To avoid fraud in your brick and mortar stores, it’s best if you upgrade your hardware to an EMV chip card terminal. Your network and POS system must be secured as well.

If you’re processing payments online, use an address verification system (AVS) to add an extra layer of security to the transaction. 

You should have specific processes in place, such as a fraud metric system, to flag transactions that appear fraudulent. For example, if your average order value is $15 and someone spends $2,000 on a purchase, you can flag it for manual approval before it gets sent to your processing company. 

4. Don’t Mix Your Businesses

If you already have an existing merchant account with a payment processing company, it can be tempting to use that same account to process transactions for new ventures. 

But this is a fast way to get your merchant account terminated.

Never mix your businesses under the same merchant account, even if it’s a side hustle or small startup. Always open a second merchant account or consider using a third-party payment processor for low-volume transactions. 

Your merchant agreement terms are based on just one business. This means that you should only be selling what you agreed to sell in your contract. 

When you open a new merchant account, your payment processor will assign your business a merchant category code (MCC). This code is based on your industry and type of business. 

Terms of the contract and interchange fees are based on your MCC. 

Any sales outside of those terms will put you in violation of your agreement, which will likely cause an immediate freeze or funds on hold. After an investigation, the processing company could ultimately decide to terminate your merchant account for this violation. 

5. Capture Signatures and Keep Receipts

To protect your business from fraud and chargebacks, you need to keep accurate documentation of your transactions. 

A chargeback can be issued up to 180 days from the initial purchase date. When this happens, an investigation will be opened by the processing company or issuing bank. 

If you have receipts, signed invoices, transaction numbers, batch data, and other information to show that the sale was legitimate, you’ll need to produce those records during the investigation. 

While merchants rarely win chargeback disputes, this information is still valuable to the payment processing company. It proves that you’re conducting legitimate transactions, even if the customer ultimately wins the chargeback. 

6. Avoid Manually Keyed Transactions

If your credit card terminal isn’t reading a card correctly, you might be tempted to enter the card details into the machine manually. But you should think twice before doing so.

For starters, manually keyed transactions are subject to higher processing fees, since they have a greater risk of fraud. 

Credit card processors don’t like to see merchants with lots of keyed transactions (unless your business is setup this way). So if a card isn’t being read properly, it might be time for you to upgrade your equipment. Otherwise, ask the customer for an alternative card or payment method. 

For phone orders, it’s better to process transactions through an online virtual terminal, as opposed to keying them into your card terminal. 

7. Keep an Open Line of Communication With Your Processor

When in doubt, always communicate with your credit card processing company. Let them know before you process a transaction that could be considered a red flag.

For example, let’s say you have a small coffee shop. Based on what you’re selling, your average transaction might be between $3 and $15. 

If a customer wants to hold a private event at your location, you might charge them $1,000 for the afternoon. Before doing so, contact your processor and let them know about the charge. 

Otherwise, they could potentially flag the transaction and put your funds on hold while they investigate the abnormally high charge. 

Final Thoughts on Merchant Account Holding Funds and Freezes

If your account gets frozen or put on hold, it can cause a significant cash flow problem for your business. The former would prevent you from processing future payments until the freeze was lifted, and the latter temporarily keeps funds out of your bank account. 

At worst, your payment processor could terminate your account altogether for too many red flags or agreement violations. 

Don’t put yourself at risk for these scenarios. Instead, follow the tips and best practices that I’ve outlined in this guide. 

Speaking of your processing terms, did you know that your credit card processing rates are negotiable? Contact us here at Merchant Cost Consulting, and we’ll help you save money on processing fees.