High-Risk Merchant Accounts: Avoid Holds & Terminations in 2025

In this episode, Frank covers how high-risk merchants can avoid account freezes, terminations, and funding holds. He explains what triggers risk teams—like chargebacks, sudden volume spikes, or unapproved business changes—and shares how to stay in good standing with your processor through proactive communication, proper documentation, and smart redundancy with multiple merchant accounts.
In this episode, these questions and topics will be covered:
• 01:30 – Why do banks and ISOs have risk teams, and what role do they play in merchant processing?
• 06:11– Common red flags that can get your account frozen: chargebacks, disputes, transaction spikes, and changes in your business model.
• 09:36 – What happens when your funds are held, and how to respond effectively.
• 10:48 – The importance of monitoring chargebacks.
• 11:32 - Why you should always have more than one payment processor to protect your business.

Navigating merchant payments doesn’t have to be a mystery. By understanding how risk teams operate and proactively managing your transactions, you can avoid unnecessary disruptions to your business. If you found this episode helpful, don’t forget to subscribe and share it with a fellow business owner!

Have a question about something in the episode? Send your questions to Info@PayDiverse.com and check out our FAQ page https://paydiverse.com/faq

Connect with PayDiverse:
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Website: http://www.paydiverse.com
LinkedIn: https://www.linkedin.com/in/franksena

Transcript

UNKNOWN: 0:00

Thank you.

SPEAKER_00: 0:05

Hey, welcome to The Payments Guy, your ultimate guide to demystifying the confusing world of merchant payments. I'm Frank Senna, your host, a merchant payment specialist with nearly a decade of experience. In each episode, we'll break down the toughest challenges in the payment space so you can be better informed when navigating payments for your own business. From minimizing the impact of chargebacks, avoiding funding issues, and ensuring you're never stuck without the ability to process payments, we'll help you make smarter decisions Let's get started. Imagine waking up to find out that your merchant account funding has been frozen. That's right. You have no access to the funds for the transactions that you processed, and you have no way of processing payments. It happens more often than you think. Today, we're going to talk about how to prevent it. So this is an important topic for merchants because merchant accounts can be terminated or frozen unexpectedly without notice, which completely disrupts a business's ability to operate and collect payments. Many merchants don't realize that their account is at risk of being terminated or their funds held until it's too late, but you can prevent this in certain situations. Today, we're breaking down why risk teams will flag a merchant's account, what common mistakes will lead to issues like this and how to stay in good standing with your merchant bank. So why do ISOs and banks have risk teams? As a reminder, an ISO is an independent sales organization. They're basically a company that gets hired by merchant banks to handle all of the merchant stuff on behalf of the banks. So an ISO will do the underwriting and ensure that a merchant is eligible to get a merchant account and that they are a low risk to the bank if the bank decides to go into business with that merchant and collect payments for them. So an ISO will help businesses to get set up with a merchant account by underwriting them. And then they also will help manage that merchant account after it's live. And that's dealing with fraud issues, chargeback issues, funding issues, technical issues, all of that stuff. So ISOs operate under an acquiring bank, and they are responsible for ensuring that their merchants comply with the card brand's rules. So Visa and MasterCard, Discover, Amex, they have rules that all of these merchant banks have to follow, and the ISOs ensure that the merchants are following the rules and not getting those merchant banks in trouble. So the ISOs monitor a merchant's transactions for any unusual patterns that could be a red flag because unusual transaction patterns could indicate that there's chargebacks coming in, that there's maybe some fraud going on with the account, or some other reason that could be risky to the bank. So if risk isn't managed properly, ISOs and banks can face penalties, financial loss, or they can even lose their ability to process payments and play in this merchant processing space. So that's why these ISOs have risk teams who their whole job is to watch out for the merchant bank and make sure that the merchants aren't doing anything that could get the merchant bank in trouble, essentially. So these risk guys are monitoring transactions for unusual patterns that could indicate an issue. So what are some red flags that a risk team might be looking out for? High chargebacks, for sure. Chargebacks are always the number one thing that a risk team is going to be concerned with, but they're also looking at excessive refunds, which could be an indication that there's going to be some chargebacks coming through or any other sort of fraud alerts. Unusual transaction patterns like a sudden spike in a merchant's volume of transactions that they're processing or getting a ton of declined transactions attempts, these are red flags that could unnerve a risk team and cause some sort of issue with your merchant account. Another common thing that these risk teams are looking for is if there's a change in the business model, which they can tell by looking at the transactions. They're looking at the dollar value of the transactions, the frequency of the transactions. And for example, if a merchant suddenly decides to start offering a subscription to their customers, but they have not gotten that approved with their merchant bank, that could be a huge red flag because with a subscription billing model where you're passively billing your customer's credit card, there's a much higher chance of chargebacks coming through on that account. So risk teams are looking out for that and they want to make sure that merchants are not making any crazy changes without first checking with that bank and making sure that the bank's okay with it because not every merchant bank wants to process transactions for a subscription business. Some of them, it's just too risky for them. So they're like, I don't want to touch it. And as a merchant, you need to understand that these merchant banks, they work with thousands of merchants. So if they lose one merchant, it's no skin off their back. They really don't care if they lose your business. That's not really like leverage that you have against them as a merchant. The banks, they just have so many merchants that they would rather cut anyone who might be an issue or cause problems with chargebacks. They'd rather just get rid of your account and not deal with you than try to figure out a solution. So it's really important that you understand from a merchant bank's perspective the risk that's associated with your business and you manage that accordingly so that the bank doesn't decide they don't want to do business with you anymore. So some common reasons that a bank might terminate your account or hold your funds indefinitely and not give you the payments that you've collected, the biggest one is always going to be chargebacks. If your chargeback ratio gets too high, your account will be flagged. And that chargeback ratio is determined by taking the total number of chargebacks in a one month period and dividing it by the total number of transactions in that period. And through that, you'll get a chargeback ratio. And the chargeback ratio If it's over 2% or 3%, the bank is not going to like that and they will likely hold your funds or they may terminate your account completely. So it's really important that you're keeping an eye on that. Another reason why a bank could put a hold on your funds is actually because of an automated risk mechanism. The banks have some technologies that will monitor transactions and if there's an unusual usual transaction pattern, some banks will automatically just hold your funds until a human can investigate and see what's going on here and maybe reach out to the merchant and say, hey, why were you trying to process a$5,000 transaction out of nowhere? You weren't approved to do that. Is there some fraud going on? Can you share some invoices? So some of these risk teams will have an automated flag that will just hold your funds. And it's usually due to unusual transaction activity. And another reason why your funds could be held is if the risk team often they have like secret shoppers who are going on the websites of their merchants and looking at what they're selling and maybe going through the transaction process. And if they see a billing model that was not approved, such as you're all of a sudden offering a free trial or a subscription that you were not not approved to utilize, that would be a reason why they might hold your funds or cancel your account completely. And another reason why they would hold funds is maybe you started selling a product that was not approved by the bank. So when you submit an application for a merchant account, you go through an underwriting process. And part of that underwriting process is the bank is going to review your marketing materials. They're going to review your website. They're going to Look at everything that you're selling. And they then say, yes, this looks okay. We can support transactions of these products. If you suddenly add completely new products that could maybe there's something controversial about them. Maybe there's a prohibited product. Maybe if it's a CBD product, the THC levels are above the limit. All of these things that could basically get a bank in trouble because they permitted the sale of this product. anything like that, they will hold your funds if they see new products that were not approved. So it's always important that you are proactively talking to your banks about any big changes that you're making to your business. So we always tell merchants it's really important to be proactive and to communicate as much as you can and be transparent. In underwriting and in risk, you will see these people who work at the bank are very skilled at finding the information information that they're looking for. And if they see something that just doesn't add up, they're not dumb. They know something suspicious is going on and they're going to give you the chance to fix it in most cases, or they'll ask questions and ask you to provide documentation. But it's really important that you are always proactively communicating with your processor and that you're being transparent. If you've got nothing to hide, then give them whatever they're asking for and they're likely going to release your funds. And keep in mind And if you expect a large transaction or volume spike, that's something to be proactive about communicating to your bank partner because they may see that giant spike in volume out of nowhere and get unnerved and hold your funds. It's also really important that you keep an eye on your chargebacks. If you start to get chargebacks on your merchant account, that is a huge red flag for merchant banks. So it's really important that you're monitoring those chargebacks and you're doing everything you can to ensure that your business is not getting chargebacks. If you start to get chargebacks, let's talk. We have different tools that can help you to prevent chargebacks or minimize them. There's best practices for e-commerce merchants to minimize chargebacks. So if you start to see chargebacks coming in, a payment consultant like myself can help you figure out a plan for making sure those don't continue to come through. And that's going to be a merchant bank's number one concern as well. We also always recommend that you have more than one payment processor. It's really important that you diversify your payment processing. You don't want all your eggs in one basket because if one merchant bank gets upset for some reason, they're going to hold your funds and all of a sudden you're unable to process transactions that can cripple your business. So we always recommend having two or three merchant accounts and this way you have a couple of backups and if there's one issue with one, at least you're still able to continue collecting payments without having your business disrupted. So what should you do if you do get a warning from your bank or they hold your funds? We always recommend, obviously, you want to act fast. The faster you can get to the bottom of this, the faster we're going to get your funds released for you. Be prepared to provide documentation. A lot of times the funds are held for some sort of unusual transaction activity. The bank or the risk team may want to see some copies of customer invoices where the dollar amount on the invoices matches the dollar amount of the transactions that you've been processing. They may even ask for the contact information for some of your customers, which I know is crazy, but the bank's got your money. You have to play by their rules. So if they want to talk to one of your customers and verify that your information that you've been providing is accurate, then I recommend give them whatever they're asking for. If you don't have anything to hide, then you want to give them whatever they're requesting. It's also really important to note that you do not want to assume that the bank is going to notify you that there's a problem. I've seen this happen so many times. Out of nowhere, the merchant's like, hey, I haven't received any funds from the bank in like two days. What's going on? And they realize a couple days later, oh, the bank is holding my funds and there's some sort of issue and I have to call them and speak to risk and figure out what the problem is. So I always recommend to my merchants, check your bank account on a daily basis and make sure that you're receiving the payouts from the bank every day as expected. Those funds are missing one day. It's really important that you reach out and try to figure out what's going on because it could be a risk. risk issue and that means that if you continue to use that merchant account to process transactions, you're just giving the bank more money to hold on to. So you want to proactively review your bank account and make sure you're getting those settlements on a daily basis. Let's review a couple of key takeaways from this episode. So merchant risk teams exist to protect the bank's interest and protect the processors from financial exposure. So it's important that you understand how they operate, what they're looking for, and what they're looking to avoid in order to have a good relationship with your merchant bank. Unexpected changes in your transaction patterns or business model can trigger account holds and funding holds. Always communicate proactively. If you're going to change anything about your business, talk to your merchant bank about it. Send them an email. Talk to your payments consultant. We have a great relationship and a direct connection with these merchant banks that we can get information back and forth very quickly for you so you don't have to deal with merchant support. Keep an eye on your chargebacks. and your refund ratio. If there's too many chargebacks or disputes, that will definitely lead to your account getting terminated and your funds being held. Finally, we always recommend that you have a backup payment processor so all your eggs are not in one basket and you're not left without a way to accept payments if something goes wrong with your merchant account and your bank is mad at you for some reason. If you'd like help managing your relationships with your processor and avoiding unnecessary holds or terminations visit paydiverse.com or email us at support paydiverse.com we'd love to help you figure this out and maintain a good relationship with your processor