Many merchants do not understand why freezes or holds occur, but these are important topics to understand. Both are for the merchant’s protection, but they can be financially stressful to your business when they occur unexpectedly. Here’s why holds and freezes occur and what you need to do to make sure you never get one.
Holds and Freezes. What’s the Difference?
A hold is when a merchant services provider withholds some of the merchant’s processing volume and puts it into a reserve fund. Think of it like a security deposit. When a hold is placed on your merchant account, some amount of your funds are withheld as a guarantee against chargebacks and fraud, but the money still belongs to you. These holds are done as a protective measure in case of fraud, refund, or chargeback. A hold can be applied to a total percentage of your volume or individual transactions. Holds are not required for every merchant account. Generally, low risk accounts with good processing history are less likely to require a hold. Though this is standard practice, it is important to understand any holds required by your merchant account.
A freeze is used as a fraud protection measure for a merchant when suspicious activity occurs. During a freeze, your credit card processing ability is temporarily shut down. A freeze allows your processor to look into the suspicious activity or processing anomaly to make sure everything is secure before reactivating the account. It is important to understand the activities that could cause your account to be flagged for a freeze. Most freezes can be avoided by understanding the causes and communicating with your processor.
How to Avoid Freezes and Holds
Most holds and freezes are the result of poor communication and suspicious activities. Follow these tips to avoid disruptions in your credit card processing ability.
- Call your processor before an abnormally large transaction. This will ensure your processor allows the transaction to go through without a hold rather than being flagged. You should also contact your processor if you expect to have a busy month or you are going to launch a new product or service for the same reason.
- Inform your processor of changes to your business. If you are going to change directions with your business — such as expanding services or going into a new industry — your processor needs to know. Otherwise, transactions can look suspicious, especially if you get a chargeback for an item or service that is outside of what your provider believes you offer. This can trigger a review of your merchant account and a hold or even termination.
- Get a high risk account if necessary. It can be tempting to misrepresent your business or services a bit to qualify for better rates and fees. Just remember that doing so can get your account terminated. A high risk account can be more stable and affordable than a regular account if your business is classified as high risk. This is because the payment processing company will expect more problems with your transactions and you will not be flagged for review.
- Reduce chargebacks. A large number of chargebacks can make your payment processing provider believe you are not delivering what you promise or that you are accepting fraudulent credit cards. A sudden spike in chargebacks can easily lead to a freeze and the requirement of a reserve fund.