It’s a problem more common than many online businesses would like to admit: a seemingly successful business having its credit card processing shut down. As it turns out, there is no reason to assume fault (if you have a legal business) when this happens, but there is good reason to start correcting the issue immediate. Processors can close or freeze your merchant account for a number of reasons – sometimes for up to 6 months – and some situations are more common than others. We’ll discuss the most common reasons below, but first let’s take a necessary brief detour to talk about risk.
When discussing merchant accounts (and fees) it is good to remember that taking credit cards is like having a lot of very short term loans: the customer’s bank loans the cardholder money, and the business’s merchant account bank loans you that money so you can be paid even if the customer has not paid their credit card bill yet. And with any loan there is a certain amount of risk involved. The risk may be small (debit cards generally fall into this category) or high (ex. business credit cards), but since the money is not transferred from hand to hand the likelihood of payment is still less than 100%.
With that in mind, the most common reasons your merchant account gets shut down have to do with the risk (or perceived risk) that the merchant service provider and merchant bank perceive in your account activity. The most common reasons are:
- A sale or sales whose amount is substantially above your average ticket volume
- High chargeback ratio (>1% of total transactions)
- An unexpected spike in the amount processed in a month
- Being in a “high risk” industry (consulting, education, supplements, certain e-commerce, etc.)
- Processing volume is sporadic (ex. $50K one month, $5K the next)
- You process with a merchant aggregator like PayPal, Square or Stripe
Unless you have a dedicated account manager with whom you discuss changes in your business, all of the above are red flags for processors that you may be engaged in suspicious activity (number 6 has to do with these company business models). If you are not, then you have nothing to fear, but there is a substantial amount of business fraud, especially with online businesses, and most merchant processors will error on the side of caution. On the other hand, if there is no suspicious activity your business could go months or years without any issues.
So what happens when you start having problems with your account? A few different scenarios are possible. Your processor will:
- Inform you that they need to hold a percentage of sales revenue in reserve to cover chargebacks
- Inform you that your account is being frozen until certain requirements are met (usually additional business info is needed)
- Inform you that your account is too high risk and hold your money and freeze your account for 3 – 6 months
- Simply shut down your ability to accept credit card payments
For most businesses, the fourth scenario is the nightmare situation but because most risk flags are triggered automatically, your business with not necessarily be informed why it is being frozen or how to proceed.
At this point you will often need to go through substantial measures to prove the legitimacy of your business, often with no guarantee that your account will be reopened quickly. Bank underwriters, who assess the business’s risk to the bank, will require detailed documentation that may include business licenses, articles of incorporation, bank statements, identity verification, utility bills, and more. In fact, this business verification process will be required regardless of who you process with so there are two steps you should take immediately if your account is shut down:
- Contact your processor to find out why the account was frozen
- Find a new processor that accepts businesses in your industry immediately
Your money and account will not necessarily be unfrozen quickly so you need to find a new account to continue your business operations.
The next question is what should you look for in a new processor?
- Does the processor on-board accounts in your industry?
- What acquiring banks does the processor work with?
Certain banks, such as Wells Fargo, have stricter lists of prohibited businesses than others and so may not on-board certain accounts
- Is there a reserve requirement i.e. will part of sales revenue be held for a certain time period?
- What are standard requirements and rates for your industry?
- What is the batch out schedule for your industry? )It can range from 1 day to 1 – 2 weeks)
- Are chargeback prevention services available?
- What are the application and cancellation fees if any?
The last bullet point is particularly important since as with business fraud there is also unfortunately a fair amount of “processor” fraud. Individuals claiming to represent merchant service companies will request information and fees from your business then disappear with both the money and your business details. Avoid automatic, online, or simple on-boarding processes that require little information about your business. At the very least you should speak with the representative by phone and use the above questions as a guide.
Real processors will not make quick promises and try to sell you on their services. They will be thorough in understanding your business and cautious until they receive prequalification notices from their underwriters. For example, for high risk accounts Horizon Payments works with multiple bank and processor partners directly and will not charge an application fee unless we can provide a merchant account for your business.
Though there are other considerations based on your specific industry and business type, you should now have a good idea of how to get your business back on track. If you have any other questions or would like to learn more, contact us.
Because having your merchant account frozen can be a challenging and time sensitive issue, if you need immediate assistance, schedule a call by clicking the button below: