Is a merchant account holding funds that you need to run your business? A merchant account hold can, and does, interrupt business, but there’s often a good reason for a merchant services provider (MSP) to hold funds.
If you use Square or another MSP, you’ve likely heard the horror stories of account holds.
However, many customers and businesses don’t truly know or understand why an MSP is holding onto their funds. So we’re going to be answering some of the most common questions relating to holds to help you better understand why merchants take this approach.
Why is a Merchant Account Holding Funds?
Merchants are holding funds because it helps protect the merchant. When a customer makes a purchase, the MSP will often deposit funds into your account before they’re paid. Since the money hasn’t landed in the MSP’s account, there’s always a risk that it won’t, and they’ll have to recover the money from the business owner.
So, the MSP will use their own discretion to:
- Reduce the risk of non-funding via a failed transaction
- Hold onto a portion of your funds
While not common, there are circumstances where the merchant’s systems go down, and they will freeze payments until everything is back up and running.
Can’t the Processor Simply Release the Funds and Take on the Risks?
Yes, but it’s not good business practice to take on unnecessary risks. You can think of a merchant account as a sort of line of credit extended to you by the MSP while waiting for the bank to collect a customer’s payment.
Since the MSP is a middleman, they’re responsible for repaying the bank if a chargeback occurs.
Business owners often have holds, such as 30% of an order’s amount, to protect the merchant from having to repay the bank. There’s always a risk that the MSP deposits money into an accountholder’s bank account, and then a chargeback occurs.
The MSP must repay the bank and then seek the funds from you, the business owner.
If you don’t refund the MSP, they lose money. Now, imagine working with hundreds of thousands or millions of business owners where even 1% might not repay the merchant. If this occurred, the merchant service provider would quickly go out of business.
How Long After a Purchase Can a Chargeback Occur?
Chargebacks can occur for up to 180 days after a transaction. A lot can happen in half a year, and if a business owner goes bankrupt in the meantime, this can lead to the merchant absorbing the purchase cost.
How Long Can a Merchant Hold Funds?
A payment processor can hold funds for up to 180 days, but it depends on the processor. Square, for example, holds 30% of funds for 120 days after the transaction occurs. However, the funds can be released earlier at the discretion of the processor.
Some businesses are high-risk, and these high-risk accounts are likely to have a merchant account holding funds for the maximum allotted time.
The types of businesses with high chargeback rates are:
- Adult products
- Airline tickets
Sellers that notice that they receive a lot of chargebacks may want to take steps to stop this trend from occurring. If you’re proactive and can vet customers better, you can reduce your risk of a long merchant account hold.
What You Can Do to Get Your Money
Businesses need their money to take advantage of business opportunities and continue growing. However, if an MSP is holding your money, you can do a few things to stop a merchant account hold in the future.
Read Through Your Contract
Your first course of action is to read through the contract with the MSP. If you read through the following processors, you’ll be surprised that you agreed to a general hold clause that is rather vague and not in your best interest:
Processors can, at their own discretion, place a hold on your account with little recourse. However, if you read your terms and it doesn’t mention any information about placing a hold on your account, you can then argue for a release.
Dispute the Chargeback If That’s Why Your Account Has a Hold
If your account has a hold and you do a little digging, it may be that you had a chargeback on the account. Unfortunately, Visa, MasterCard and Discover all favor the consumer because credit card theft is so common.
However, you can dispute the chargeback if you know that the consumer is issuing a chargeback simply to get something for free.
A few things to keep in mind is that you must:
- Respond rapidly to the chargeback
- Follow the rules of the respective company
- Submit paperwork to prove the chargeback isn’t warranted
You may lose the dispute, but the processor may be willing to release your funds if you win.
Learn If You Violated Something in the Terms of Service
MSPs have rules that, if violated, can lead to your money being put on hold. There are a few scenarios where sellers break the rules unknowingly, such as advertising unauthorized products or advertising such products.
You must be honest with the processor, so you cannot misrepresent your business in any way.
Compliance is a major concern for payment processors, and it’s up to you to do everything that you can to remain in the processor’s good graces. Returning to compliance may result in the hold being lifted.
You may have to be aggressive and try to push the processor to release your money, but be prepared to lose the battle. If a processor has a good reason for holding your money, such as a high chargeback rate for your business or industry as a whole, they’ll use their discretion mentioned inside of your contract to validate the hold.
If you reach out to the MSP, you should try and discuss the steps you can take, if any, to release the funds in your account.
Always be prepared to reach out to the processor again and to follow through as necessary.