Merchant Account Holds and Freezes: All You Need To Know

Your merchant account enables your business to process card payments cheaply and get paid quickly for all your sales. But your merchant account provider may put a temporary hold on funds from a sale or even freeze your account and prevent you from accepting card payments, potentially causing you some major cash flow issues.

This usually happens if your provider suspects fraud and needs to investigate, but there are other reasons. Read this guide to learn everything you need to know about merchant account holds and freezes, including what to do if they happen and how to avoid them.

What Are Merchant Account Holds and Freezes?

Merchant account holds and freezes are two different types of actions your merchant account provider can take while investigating potentially fraudulent transactions. Merchant account providers use holds and freezes so that they have time to investigate transactions before transferring funds or processing additional payments.

A merchant account hold occurs when your merchant account provider temporarily holds back funds from a sale. Instead of passing funds from the sale onto your business bank account, the merchant account provider sends the funds into a secure escrow account until the hold is lifted.

A merchant account freeze occurs when your merchant account provider temporarily limits your business’s ability to process new card payments. While a freeze is active, you can’t accept any credit or debit card payments using your merchant account.

Merchant account holds are typically much less disruptive than freezes. They can cause temporary cash flow issues, but at least you can still accept new sales.

Your merchant account provider can impose holds and freezes separately or at the same time.

Causes of Merchant Account Holds and Freezes

Merchant account providers can put a hold or freeze on your account for several reasons. Let’s take a closer look at the most common causes.

Credit Card Chargebacks

If your business has a lot of credit card chargebacks, your merchant account provider is going to want to find out why. Merchant account providers take chargebacks seriously because they can indicate your business isn’t fulfilling sales or isn’t taking measures to prevent fraud.

Notably, even if you successfully reverse chargebacks, they can still count against your business in the eyes of your merchant account provider.

Suspicious Transaction Volumes

If your business normally processes 10 transactions per month and then suddenly processes 100 transactions in a month, your merchant account provider is likely to consider this suspicious. The same is true if your average sale is $50 and then you have a single transaction that’s $800.

Suspected Fraudulent Transactions

If your merchant account provider suspects that your business is defrauding customers, it is likely to put a hold or freeze on your merchant account while an investigation is underway.

Late Payment for Merchant Account Fees

If you haven’t paid your merchant account fees, your merchant account provider can respond by placing a hold or freeze on your account. A hold or freeze instituted for this reason will normally be lifted when you make a payment.

Violating Terms of Service

If you violate the terms of service of your merchant account, your account provider can activate a hold or freeze. Possible ways you could violate the terms of service include:

• Expanding your business into an industry that your merchant account provider does not support
• Accepting payments on behalf of another business
• Processing more transaction volume than your contract allows

Legal Requests

Legal or investigative authorities such as the police can ask your merchant account provider to place a hold or freeze on your account. Many merchant account providers will comply with these requests even if they aren’t legally required to.

What To Do if Your Merchant Account Is on Hold or Frozen

Holds and freezes are at the discretion of your merchant account provider, so there isn’t much you can do to get a hold or freeze lifted. Their investigation needs to run its course.

One thing you can do is to contact your provider and ask whether there’s any documentation you can provide to speed up the investigation. This could include receipts, invoices, or even bank statements. Providing bank statements enables a merchant account provider to evaluate your cash flow and determine whether you can repay funds in the event of a chargeback later.

During a freeze, you can continue to accept cash payments, but you won’t be able to accept card payments. If a hold is creating cash flow problems for your business, you can consider seeking a short-term business loan to cover expenses.

What To Do if Your Merchant Account Is Terminated

It’s possible that your provider will decide to terminate your merchant account at the end of the investigation. If that happens, you’ll need to find a new merchant account provider.

That can be challenging since your business will be added to a list known as the terminated merchant file, which most merchant account providers check before issuing new accounts.

You will likely have to work with a high-risk merchant account provider. These providers typically charge higher fees, take longer to transfer funds to your business bank account, and may require you to post collateral funds in an escrow account.

Another option is to operate as a cash-only business. However, this can drive away customers in many industries.

How To Avoid Merchant Account Holds and Freezes

There are a few things you can do to minimise the likelihood of triggering a hold or freeze on your merchant account.

1. Reduce Chargebacks

Chargebacks are one of the most common causes of merchant account holds and freezes. They can result from fraud, but also from instances in which a customer received a damaged product or a product that was significantly different from what they expected.

If you’re selling online, make sure that your product descriptions and photos are accurate and up to date. Establish good communication channels so customers can contact your business when a problem arises rather than initiate a chargeback.

2. Protect Against Fraud

Accepting fraudulent transactions can result in a high number of chargebacks as well as scrutiny from your merchant account provider. So, it’s important to be on the lookout for fraud, especially for online purchases.

Make sure you require a customer to enter their card’s expiration date and security code in addition to the card number. In addition, if you receive an unusually large purchase, contact the customer to confirm. You should also be on the lookout for purchases with mismatched shipping and billing addresses.

For in-store purchases, one of the best ways to defend against fraud is to use a credit card machine with an EMV chip reader. EMV chips are much more difficult for fraudsters to replicate than magstripes. You can also check customers’ IDs or request a signature on receipts.

3. Be Honest About Your Business

It’s critical that you’re honest about your business when applying for a merchant account. If you fudge the truth, your merchant account provider will find out about it eventually. Your account could be terminated as a result.

That means you need to accurately describe your industry, what your business sells, and how much transaction volume you have. If you make changes to your business or expand into a new industry, let your account provider know. If you start a second business or a side hustle, you must open a second merchant account rather than use the same account.

4. Communicate Proactively

One of the best ways to avoid a hold or freeze is to communicate with your merchant account provider as soon as you think there might be a problem.

For example, if you have an unusually large transaction, call your account provider’s fraud team to let them know about it. You may be able to proactively provide invoices or receipts so that they can verify the transaction before a hold is necessary.