PayPal Account Terminations: High-Risk Merchant Processing Guide 2025

PayPal is an easy-to-use payment processor, but that convenience comes with a cost. In this episode, Frank covers PayPal account terminations and real payment alternatives for high-risk merchants. As thousands of online businesses lose access to PayPal every month, Frank explains exactly how PayPal’s approval system works, why so many merchants get flagged, and the concrete steps you can take to protect your business from sudden shutdowns and frozen funds.

In this episode, these questions and topics will be covered:

• Why PayPal terminates accounts and how its payment facilitator model exposes merchants to sudden risk
• Common industries labeled as “high risk”and the termination triggers that lead to frozen funds
• What to do and what not to do immediately after termination
• The account switch that will protect your cash flow
• The underwriting process explained: how it protects your business and speeds up approvals when done right
• Proven strategies to keep your account safe and the one golden rule every merchant must follow 

If your PayPal account has been shut down or you’re in a high-risk industry, don’t wait until it’s too late. Visit paydiverse.com to get matched with a trusted high-risk merchant provider today.

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:
Instagram: https://www.instagram.com/paydiverse
Website: http://www.paydiverse.com
LinkedIn: https://www.linkedin.com/in/franksena

Transcript

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In each episode, we'll break down the toughest challenges in the payment space while 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 will help you make smarter decisions and grow your business. Let's get started. With your PayPal account shut down, you are not alone. Thousands of merchants, especially in industries that are considered high risk, are terminated every month with little to no warning. Your funds get frozen for up to six months. That's 180 days of no funds. It's impossible to get in touch with customer service, and you're not allowed to appeal it. Let's talk about why this happens, what to do next, and how to protect your business so you can process payments whenever you need to. I'm Frank Senna, the co-founder of PayDiverse, and I consult merchants on how to get payment solutions for their businesses. In this episode, we're going to talk about how PayPal's approval system actually works, why merchants who are deemed high risk are targeted by PayPal to get terminated, what to do if you're terminated, and real alternative payment solutions that will last for your business. So this never happens again. So PayPal's convenience is a double-edged sword. It's super easy to get started, but it's just as easy to get terminated and lose your account and have all of your funds held. So let's talk a little bit about PayPal and why this happens. PayPal is not a traditional merchant account, it's what's known as a payment facilitator or a PayFac. Essentially, instead of giving you your own designated merchant account as a merchant, PayPal is giving access to their merchant account to thousands of merchants out there, all processing under the same account. The nice thing about this is that merchants can apply online and they can get approved really quickly and start collecting payments within the day. The risk checks happen after you get approved. So essentially, PayPal's strategy is let's just get as many merchants as we can using our product and then we'll figure out the compliance stuff afterwards. So they have algorithms that will monitor your transactions and flag any unusual activity. They also take a look at your website after the fact to see if there's anything on there that might not be compliant with Visa and MasterCards guidelines or even with state or federal laws. Merchants who are considered high risk, that uh that name or title of being high risk is determined by the merchant bank. It's from their perspective. They're basically saying, okay, a merchant that is more likely for us to lose money because we were working with them, they're going to be considered riskier for us, the bank, to work with. So high-risk merchants are merchants who typically have a high amount of refunds, a high amount of fraud risk, and most importantly, highest risk of getting customer disputes or chargebacks. So some examples of a high-risk merchant would be a merchant that has a subscription-based billing model, meaning they are passively billing a customer's credit card every month and receiving payment from that customer. It could be merchants who are selling supplements online or CBD where they might have unsubstantiated health claims. And so someone gets the product and they're like, this isn't really working. I'm just going to call my credit card company and have them reverse the charge. It could be merchants who are doing online coaching that might that might cost a lot of money in one transaction. Merchants who are selling digital goods that you can download in a card not present environment, or merchants like in the travel industry where they're collecting payment for something now that's not actually going to happen for weeks or months in advance when they actually take their trip. PayPal's model is not built to manage these high-risk profile merchants. They want the easy stuff. They want the hair salon, they want the food truck, they want the pizza place, they want stuff that is going to be kind of churn and burn. They can sign these merchants up and the merchants start using them and moving forward. So let's talk about some common triggers for why PayPal might terminate a merchant's account. First thing is if you have inconsistent sales patterns or volume spikes, meaning you're processing a certain amount for a couple of weeks or months, and then all of a sudden your transaction volume jumps. This can indicate that there might be something fraudulent going on and is a red flag that could trigger your account to get held or terminated. The number one thing that is going to get your account terminated is if you're getting excessive refunds or excessive chargebacks. A chargeback is a customer dispute. So it's basically a customer who might call and say, I was unhappy with the service I provided or I received, or I never received the service that I paid for, or it's a scam and I should get my money back. Those are the number one thing that will kill your merchant account, whether you're using PayPal or you're going directly with an acquiring bank who is even into the high-risk space. If you are selling restricted items, even if they're legal or it's in like a legal gray area, this could be like CBD products, it could be like products that have AI technology behind them that banks don't really know how to regulate or assess risk for. Again, if you try to just sign up again and use a different email address, or have your wife or your husband sign up on behalf of you, it's probably not going to work. All these different things are data points that the banks have access to that will kind of clue them off. That a merchant might be the same merchant that got terminated previously. What do you do when you get terminated by PayPal? You should really follow PayPal's instructions exactly. They might request some customer data if they have put your account on hold, which doesn't mean they terminated it, just means they're doing a risk evaluation, they're going to not let you process any more payments for a minute, and they're going to hold on to your funds and not pay them out to you until you resolve any issues that they have. So read the email carefully, read the communication, and follow exactly what they say to try to help get your funds released and allow them to process payments for you again. You always want to cooperate with these guys and you always want to be transparent. Don't ever try to hide anything from the bank. They've got risk teams and underwriting teams. Their jobs are to find the BS. So they're going to be looking out and looking for things that are inconsistent or things that might look altered. If you provide documentation that's altered, that's a huge no-no. You always want to be transparent with your bank because they, in the end of the day, they hold the cards. Next, you got to find a new way to accept payments as soon as possible. A reliable and easy way to get approved that usually happens pretty quickly, is to use an alternative payment method like ACH or e-Check, meaning your customers can provide their bank account details through your website and they can pass funds from their website to yours, or they can use essentially an electronic check from their bank account that gets cleared and gets put into your account. That can usually get set up in a day or two, and uh usually you would get your funds with like a two or three day delay after the customer submits the payments. Um, you could try to get approved with Stripe and Square. The problem is they have the same model as PayPal. So you may be able to get approved really quickly and really easily with them and get up and start collecting payments. But again, their technology might flag your account and hold your funds and prevent you from collecting more payments, which means you could lose even more money. There's that convenience of just getting on, signing up and going, but there's a huge risk of losing your funds and not being able to get them back quickly. It's maybe a temporary solution, it's not a long-term solution. What you really need is to get a high-risk merchant account. This is a merchant account that is uh provided by an acquiring bank who understands the risk that your business has associated with it and is still willing to go into business with you and collect payments under their terms. There's also some alternative payment solutions out there, like a crypto solution that perhaps your customers' funds are converted into cryptocurrency and the transaction happens, and then you're paid out in cryptocurrency as the merchant, and then you need to convert the cryptocurrency into fiat or into you know USD. And that's quite complicated. Some of these solutions have unpleasant customer experiences when they're checking out. They're um it might redirect them to another site, it might require them to sign up for some uh other third-party account for the crypto. So those are options, they're maybe not the best long-term options because, in my experience, uh cardholders don't like having to go through all that trouble to submit payment. Working with a specialized merchant bank that is focused and specializes in high-risk merchants is your best bet. They have an underwriting team who looks at your account with the understanding that uh the products you're selling might uh be a little controversial, that um your billing model might be a little riskier because you're offering a subscription or a trial. Um but they have risk guidelines for all of these types of businesses. So they really do understand. They may ask you to make website changes to your website to make it easy for customers to unsubscribe or to make the website more compliant by adding terms and conditions, things like that. Um, but by going through this underwriting process to get a merchant account, you're actually getting all the risk triggers out of the way in advance. And you're kind of letting the merchant bank know this is what I do, and this is how I do it, and this is how I collect how I want to collect payments, and the bank will approve you, and you're usually pretty good once you get approved. My company, Paydayverse, we are payment solution brokers and payments consultants. We connect merchants with over 200 merchant banking solutions that we have within our network. They're all high-risk friendly banks, so we have access to all of them, and we help merchants every day to identify a submission strategy of which banks they want to work with and help them navigate the underwriting process so that they can get approved and their website or business can be compliant. It takes a few days, typically 24 to 72 hours to get approved, depending on the solution and the business type. But once you're approved, you're usually good as long as you don't try anything fishy after you get approved. So the underwriting process is basically the process of the bank getting to know you and assessing the risk of going into business with your business. They verify that your business is legit, it's registered with the state, you have an EIN. Um, they verify your identity, that you're not uh a sketchy person or someone who is an identity thief or something like that. It's kind of like applying for insurance if you've ever done that. Um they're just thoroughly reviewing your financials, your business details, and your identity. Um, underwriters will review what you're selling, how you fulfill it, um, what your refund policy is, what your dispute policy is, uh, your transaction sizes, your transaction frequency, and they'll take a look at your financials because they want to make sure they're going into business with someone who can pay their bills. Seems fair to me. If I was an underwriter, I would also want to work with merchants who had their stuff together and uh could show that they're able to pay their bills every month and they're not gonna just go under. Um, something that I help and always uh suggest my merchants to do is to provide a business summary document where you touch base on a couple of really important factors. It's essentially um it's essentially learning what the underwriter is going to want to ask in advance and putting all that information into a document. So it reduces the back and forth between the merchant and the underwriter and allows a much faster approval. It will answer questions like what's your background in the business? How long have you been doing it? What are you collecting payment for? How do you are you funding the business? Um, who are your vendors? Things like that. So, how do you prevent yourself from getting terminated in the future? Regardless of what kind of payment solution you are offering your customers, the golden rule of working and maintaining a relationship with your bank provider or your merchant account provider is transparency. You don't ever want to hide things from them. You don't want to try to withhold information because their teams are specifically trained to look out for things that could be risky to the bank. So always be straightforward, be proactive in your communication, notify them if you're doing perhaps a promotion where you're expecting a huge spike in volume. That's always good to be proactive about because otherwise they might see a large amount of volume coming in on your merchant account out of nowhere, and they think, oh, this is fraud, something risky is going on, we're going to close the account or we're going to hold this merchant's funds. Be proactive, get approval before you add new products, because sometimes you might add a product that might not be compliant, or um adding a product that might have a new billing model that you weren't approved for, like a subscription or something like that. Definitely keep an eye on your chargebacks. If you start to get chargebacks, that is a huge red flag for banks. One off here and there, that happens, but if it's a consistent thing, the bank's gonna want to know why. What is going on? Why are you getting disputes? Why are your customers calling support? You need to figure that out and you need to uh remediate that immediately. And we always recommend having at least one backup account. This way, if you have an issue with one of your merchant providers and they halt your ability to process payments, you have a backup ready to go. Treat your processor like a business partner and not like some tool. Be open with them, be fair, and they will be fair back to you. So, some key takeaways from today's episode are that PayPal's automated model means there's no real underwriting up front, which is why your account can get shut down without any notice after you start using it. This applies to Stripe and Square as well. High-risk merchants or merchants who are considered to be extra risky by a merchant bank are most vulnerable to getting their accounts terminated or getting their funds held. Termination, if that happens, your funds are going to be held for up to 180 days and your cash flow is cut off immediately. So you really want to avoid getting terminated and you don't want to be dependent on a processor who's not comfortable with your business. Some quick options could be signing up with ACH or e-Check solutions, but a sustainable solution would be a specialized high-risk merchant account. And underwriting will ensure that your account stays open long term. It's a safeguard. It's a little bit annoying to get through, but that's why people work with me. I help merchants get through the underwriting process quickly and efficiently so they can get processing and collect payments really fast. So if PayPal shut down your account or you're in an industry where you might be vulnerable to your account getting terminated or your funds getting held, do not wait until it's too late. Visit paydiverse.com or email us at support at paydiverse.com to get connected with the right bank before your processor pulls the plug.