Charge Card Systems Blog

Merchant Best Practices - Avoiding Merchant Account Holds

Merchant Account Holds

An extremely important but seldom talked about topic regarding credit card processing is that of merchant account holds. One of the most financially devastating things that can happen to a business is for a processing bank to freeze its merchant account. If this happens to your merchant account, you won't be able to access the account and your funds from open authorizations will be held without deposit for an undisclosed period of time. This means that you can't accept new credit card transactions and the income from recently processed transactions will not be deposited for days, weeks or longer.

There are two basic reasons that cause a merchant service provider to apply a hold on a merchant account.  The first reason is breaking terms agreed upon in the merchant service agreement. The second is suspicious processing behavior.

To open a merchant account a business must sign a merchant service agreement. This agreement outlines the rules, fees, and limitations in respect to processing volume and average ticket size for the merchant account. If a business breaks any of the provisions in their merchant service agreement, the processing bank can hold or even terminate their account. In the case of an account being held, it will be unusable for as long as it takes the processing bank to investigate the breach of the agreement and make a ruling on whether or not to reinstate or terminate the account.

The following is a list of common reasons why businesses are found in violation of their merchant service agreement.

Excessive chargebacks
Chargebacks are taken very seriously by processing banks, and excessive chargebacks are a leading cause of merchant account holds and closures. A common misconception regarding chargebacks is that if they're won they don't count against you. That is simply not the case. Win or lose, a chargeback is a chargeback, and too many will lead to your merchant account being held, closed or worse.

Processing in excess of declared processing volume and average ticket
When you apply for a merchant account, you have to declare your business' average monthly processing volume as well as your average ticket. Many people forget about these numbers when they begin processing, but rest assured that processing banks don't.

These two figures are far more than a formality. Processing in excess of your declared volume or average ticket can lead to your account being held or terminated.

Using a merchant account to accept payment for undisclosed goods or services
Merchant accounts aren't a free pass to accept credit card payments for whatever you're selling on a particular day. When you applied for your merchant account, you would have had to provide a basic description of the goods or services that you're selling. Using the account to accept payment for anything outside of this description would leave you in violation of you agreement and open to recourse by the processing bank.

Using a merchant account to accept payment for other businesses
Merchant accounts are issued to individuals or businesses for use by that party only. Using the account to accept payment for another person or business is strictly forbidden. Once discovered, this behavior will almost certainly lead to the account being terminated.

Suspicious processing behavior is another leading cause of merchant account holds. Holds for this reason are especially tough because they typically applied by the processing bank without notice to the merchant. Merchant usually realizes that their account has been held when they try to charge a credit card or when they stop seeing deposits from credit cards sales on their checking account ledger.

Preventing holds due to suspicious processing activity means avoiding behavior that will trigger a processor's fraud alert. Being aware of a few general guidelines while you're processing transactions will help you to accomplish this.

Contact your processing bank's risk department, not your sales representative, prior running unusually large transactions. Attempting to process a single large transaction beyond what is normal for your account will almost certainly lead to a hold.

Keep your processing bank informed on changes in your business that will affect your processing behavior. For example, if a bait shop that has been selling only small bait and tackle items for years begins to sell deep sea fishing equipment, their average ticket that has been $15 may spike to $500 or more overnight. This drastic change may lead to their processing bank holding their merchant account until the reason for the ticket increase can be investigated.  Notifying your processing bank of changes in your processing behavior will allow them to adjust the ticket and volume figures for your account before there's an issue.

Don't process excessive card-not-present transactions with a card-present merchant account.

Aside from the expense of mid and non-qualified surcharges that you would incur, keying-in too many transactions on a merchant account that was set up for mostly swiped transactions will lead to a fraud alert. If you're business has a decent amount of card-present and card-not-present transactions, opening multiple merchant accounts will help to avoid any fraud alerts and it will save you on processing expenses.

If your account does end up getting held by your processing bank, there's not too much that you can do except let the process run its course and focus on damage control. The process will take time. In extreme cases where the cause of the hold is not deliberate and a substantial amount of funds are being held, seeking legal council from an attorney that specializes in bankcard law would be an advisable step.

Courtesy of:  MerchantCouncil.org

For more tips and advice on managing your merchant account, download a free copy of our Guide To Merchant Best Practices.

Merchant Processing Advice - Chargeback Fraud

A proactive and thorough plan to prevent and deal with chargeback fraud is a must-have for any business that accepts credit cards. Without an effective plan, chargebacks can become costly and a high chargeback ratio can even prompt a processor to close a merchant account.

There are various reasons why cardholders issue chargebacks. Some of the most common reasons for chargebacks are failure to receive a product in the specified time, or products being misrepresented by marketing (leading to customer dissatisfaction). Whatever the reason, the loss associated with a chargeback is magnified if a customer issues a chargeback after they've already received products or services.

If a customer disputes a charge for a product or service that they've already received, the merchant stands to lose capital, profit and product. If the product or service is expensive this combination can amount to a substantial loss. An effective chargeback plan lessens the frequency of chargebacks and increases the likelihood of winning disputes when they are issued.

Chargeback fraud is difficult to combat with even the most comprehensive chargeback plan. Chargeback fraud occurs when a cardholder issues a chargeback with the intention of extorting products or services from a merchant. In a fraudulent chargeback scenario, a cardholder has no basis for issuing a chargeback. The cardholder's motivation for issuing the chargeback is to steal products or services from a merchant by taking advantage of the chargeback system.

Unfortunately, banks often unwittingly facilitate chargeback fraud by immediately reversing disputed transactions prior to contacting the merchant involved. By simply issuing a chargeback the cardholder has the battle half won. When a cardholder issue a fraudulent chargeback, they've received the product or service from the merchant, the bank has given their money back and they haven't even had to supply proof to support their chargeback claim. If the merchant doesn't respond to the bank's chargeback notice within a specified time frame (which usually doesn't exceed 10 days), the cardholder will succeed in abusing the chargeback system for personal gain at the expense of the merchant.

Merchants have taken issue with the inherent problems and bias in the chargeback system for a long time but it doesn't look like banks will be changing their policies any time soon. In the meantime, it's imperative to include methods for preventing and winning fraudulent chargebacks in your chargeback plan.

The best weapon against fraudulent chargebacks is thorough sales documentation including sales receipts, signatures and proof of delivery (if applicable). Customers that issue fraudulent chargebacks have no substantial proof to support their claim. By maintaining complete sales records you greatly increase your chances of winning these potentially costly chargebacks.

If your business doesn't have a chargeback plan, make one. If you need some pointers to get started, there's helpful information available on chargebacks at merchantcouncil.org. Of course, even the greatest chargeback plan is ineffective if it's not followed for every credit card sale. Once you create a solid chargeback plan, be sure that everyone who deals with customers is familiar with it.

To learn more about our Merchant Account Services or to find out if you're getting the best rates on your current merchant account, click here for a free rate analysis.

How To Avoid Merchant Account Mistakes

Tips To Keep Your Account in Good Standing

There are several key Merchant Account 'Mistakes' that may cause a processor to close a merchant account - This blog post addresses these activities, and what innocent businesses can do to avoid having this happen to them.

Any type of unusual processing activity
Unusual processing activity is the primary reason why processors close merchant accounts. Unfortunately, the definition of unusual activity is open to interpretation. Generally, common sense and a willingness to err on the side of caution is the answer to avoiding having your merchant account closed for unusual activity.

Too many chargebacks - won or lost
Regardless of whether a chargeback is won or lost, too many in a relatively short period of time may cause a processor to close a merchant account. It is important to take steps to limit the number of chargebacks that you receive and to correct any issues that have lead to chargebacks in the past.

Selling products or service other than those declared on the merchant service agreement.  If a processor discovers that you are selling products or services that are substantially different than those indicated on your merchant service agreement, your account will likely be terminated.

Processing transactions for other people or businesses
Merchant account factoring occurs when someone uses their merchant account to process transactions for another individual or business. If a processor discovers that a merchant account is being used for factoring, the account will be closed and the owner may be subject to fines or even criminal charges.

Unusually high average ticket
Processing a single transaction that is much larger than average can lead to your merchant account being closed and your funds being held. When you opened your merchant account you declared an average ticket size. Processors remember this number and they'll shut your account down if you process transactions far in excess of this amount.

Unusually high processing volume
Similar to excessively large tickets, if you process too much volume in a monthly period a processor can close your account and hold your funds. Processors will expect you to process amounts that are consistent with what you stated on your merchant account application. Anything far above this number will cause them to close your account. An exception to this rule is seasonal swings that can explain higher volume. For example, a retail store will be expected to process larger volumes around the holiday.

Unfortunately, processors close merchant account every day because the owner of the account made an innocent mistake. The problem is that it's tough for processors to determine who is truly innocent and who has ulterior motives. Taking steps to avoid the reasons above is a very good start to keeping your merchant account in good standing.

For more information or to find if you're getting the best rate on your merchant account, click here for a free rate analysis.

 

Best Practices to Prevent Chargebacks on Credit Card Processing

Merchant account chargebacks are an increasingly expensive problem not only because of the fees charged by the processor, but also because of the time and energy that a merchant must invest to try to win a dispute.  A thorough chargeback prevention plan can help limit the number of chargebacks that your business receives.  Below are some tips and best practices for preventing 3 common types of chargebacks:

Preventing customer-related chargeback issues: 

Use a recognizable DBA name - if the DBA is not easily recognizable to a cardholder on their statement, they may not recognize the charge and may issue a chargeback.

Include a phone number on cardholder statements - this ensures that cardholders can easily contact you with any questions regarding a charge.

Clearly post policies - make sure that policies such as returns and damaged merchandise are clearly visible and easy to understand.

Work with customers to resolve issues - it sounds simple but if you don't communicate with customers to resolve issues, you're forcing them to resort to a chargeback to solve their problem.

Proactively communicate with customers - keep customers informed on the status of their orders.  Many customers won't bother to contact you if an order doesn't arrive on time, instead they may issue a chargeback.

Preventing chargebacks from processing errors:

Use address verification service (AVS) for not-present transactions - never process a card-not present transaction without an AVS match.

Swipe all card-present transactions or get a fully legible manual imprint.

Don't re-run a decline transaction - if a credit card is declined, don't run it again.  Instead, ask the customer for another card or form of payment.

Never split transactions - always authorize a credit card once for the total amount of the transaction.  If you accidentally undercharge, cancel the transaction and run another transaction for the entire payment.

Clear credit card batches daily - posting transactions to your customers' accounts quickly while the purchase is still fresh in memory lowers the chance that they won't recognize the charge and issue a chargeback.

Preventing fraudulent chargebacks (for card-present transactions):

Obtain and compare signatures - if a customer's signature on the receipt is significantly different than the one on the back of the card (or if the card is not signed at all) the transaction may be fraudulent.

Verify the number on the credit card machine matches the card - after obtaining an authorization, make sure that the number displayed on the machine matches the number on the card.

For more information on how to prevent chargebacks, you can also check with your processor, review the VISA and MasterCard websites and also look at resource sites like CardFellow for more great information.

Courtesy of MerchantCouncil.Org

To learn more about chargebacks or to find out if you're getting the best rate on your merchant account, click here for a free rate analysis.

What Makes a Merchant Account "High-Risk"?

Each merchant service provider has underwriters that are responsible for determining the risk factor associated with certain types of business and accounts.  When determining whether a business type is unacceptable or restricted, a provider considers criteria such as:

• Chargbacks:  Certain business types are prone to having a high occurrence of chargebacks to sales.  Any business type that has a typical chargeback ration that is 1% or higher, is usually considered high-risk or unacceptable by most credit card processors.
• Credit Card Fraud:  Credit card fraud is more common in certain industries because of the products or services offered.  Any business type that has a higher than normal fraud rate will be considered high risk or unacceptable by many providers.
• Charging too far in advance for services:  Merchants that charge for products or services too far in advance heighten their exposure to excessive chargebacks.  Subscription publications, online memberships, and other similar services are most affected by this guideline.  Typically, a provider will limit the time in advance that a merchant is able to bill their customers to around 4 months.
• Target Market:  Specifically, businesses with an international client base are considered high-risk.  Exporters, international freight forwarders, and shipping businesses can all be considered high-risk merchants due to their international client base.
• Business Operation:  Businesses that use outbound telemarketing, door to door sales, multi-level marketing, and third party order fulfillment are all considered by most providers to be high risk merchants.  This type of businesses operation increases the likelihood of chargebacks for various reasons.
• Type of Merchant:  Card-present merchants are always considered lower risk than card-not-present merchant accounts.  For example, a courier services that utilizes a wireless terminal to swipe cards at a customer's residence may be considered high-risk, when the same business would be prohibited if they were to take credit card numbers over the phone.
• Legality:  Businesses that offer services that are illegal, or are closely related to illegal activities, will be considered high-risk or prohibited by most providers.
• Marketing:  Products or services sold using marketing that exaggerates results are at a high risk for chargebacks.  Customers will ultimately issue chargebacks once they realize that the product or service that they purchased does not deliver the results promised in the marketing.

For a list of typical 'high-risk' business types or more information on credit card processing for high-risk merchant accounts, check out Alternative Merchant Processing at http://www.ampworldwide.com