Merchant Account Hold: What It Is, Why It's Done and How to Avoid It

An extremely important but seldom talked about topic regarding credit card processing is that of merchant account holds. One of the most financially devastating things that can happen to a business is for a processing bank to freeze its merchant account. If this happens to your merchant account, 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.

Merchant account holds are behind many of the horror stories that you may have read about online or heard from friends. Merchants are often portrayed as the victim in these stories, but there are two sides to every coin. In this article I'll discuss why processing banks hold merchant accounts, how you can avoid having this happen to you and what you can do if a hold is put on your account.

Suspected fraud is often the basis for a merchant service provider putting a hold on a merchant account. In a typical situation providers are the second line of defense against credit card fraud behind the merchant. In an atypical situation where someone opens a merchant account with the intention of using it to defraud cardholders, providers become the first line of defense against fraud.

Merchant processing fraud is a big problem that merchant service providers are obligated to take action against. Providers 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 until an investigation can be conducted to determine what triggered the alarm. Such investigations result in the release of the merchant account hold or the termination of the offending 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; the affects of which can prove devastating.

There are two basic reasons that cause a merchant service provider to apply a hold on a merchant account. I'll list them here and then discuss each in detail in the paragraphs that follow. The first reason is breaking terms agreed upon in the merchant service agreement. The second is suspicious processing behavior.

To open a merchant account a business must sign a merchant service agreement. This agreement outlines the rules, fees, and limitations in respect to processing volume and average ticket size for the merchant account. If a business breaks any of the provisions in their merchant service agreement, the processing bank can hold or even terminate their 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 or not to reinstate or terminate the account.

The following is a list of common reasons why businesses are found in violation of their merchant service agreement. Study these reasons so you can avoid making the same mistakes yourself and having your merchant account held.

Excessive chargebacks
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, closed or worse.

The best defense against chargebacks starts with a good offense. Be proactive in stopping chargebacks before they occur and develop a chargeback prevention plan for your business.

Processing in excess of declared processing volume and average ticket
When you apply for a merchant account, you have to declare your business's average monthly processing volume as well as your average ticket. Many people forget about these numbers when they begin processing, but rest assured that processing banks 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.

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 applied for your merchant account, you would have had to 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 would leave you in violation of you agreement and open to recourse by the processing bank.

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 is strictly forbidden. Once discovered, this behavior will almost certainly lead to the account being terminated.

Suspicious processing behavior is another leading cause of merchant account holds. Holds for this reason are especially tough because they typically applied by the processing bank without notice to the merchant. Merchant usually realizes that their account has been held when they try to charge a credit card or when they stop seeing deposits from credit cards sales on their checking account ledger.

Preventing holds due to suspicious processing activity means avoiding behavior that will trigger a processor's fraud alert. Being aware of a few general guidelines while you're processing transactions will help you to accomplish this.

Contact your processing bank's risk department, not your sales representative, prior 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 processing bank informed on changes in your business that will affect your processing behavior.
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 has been $15 may spike to $500 or more overnight. This drastic change may lead to their processing bank holding their 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.

Don't process excessive card-not-present transactions with a card-present account.
Aside from the expense of mid and non-qualified surcharges that you would incur, keying-in too many transactions on a merchant account that was set up for mostly swiped transactions will lead to a fraud alert. If you're business has a decent amount of card-present and card-not-present transactions, opening multiple merchant accounts will help to avoid any fraud alerts and it will save you on processing expenses.

If your account does end up getting held by your processing bank, there's not too much that you can do except let the process run its course and focus on damage control. The process 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, seeking legal council from an attorney that specializes in bankcard law would be an advisable step.

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