Your merchant account has been terminated. Whether you had too many chargebacks and/or refunds, unexpectedly low volume or whatever the case, it is an unenviable position to be in.
To make matters worse, the acquiring bank through which you process credit card transactions, is holding the funds or reserve you have left until further notice. When you’re in such a predicament, it doesn’t seem fair.
Review your contract. Banks hold funds and they are well within their rights to do so.
A Common Myth About Withheld Merchant Funds
Instabill just received a grade of ‘A’ from CardPaymentOptions.com, which reviews the best processors for e-commerce businesses. CPO gave us ‘A’ grades for sales & marketing and costs & contracts; and an ‘A+’ for its Better Business Bureau rating.
We received a ‘B+’ for complaints and service, which we found disappointing. In researching this, we found that most, if not all complaints against us came because merchants had been shut down and claimed that Instabill held their funds.
This is a common misconception.
Instabill, or any other payment processor, does not hold merchant funds. It’s the merchant’s acquiring bank that holds funds.
The 3 Reasons Banks are Holding Your Reserve
Merchants should think of their funds or reserve in the same way a tenant pays a security deposit for an apartment rental. Should something go wrong at the apartment – a missed month’s rent or a hole in the wall caused by the tenant – the landlord has those funds to protect his or herself.
Here are three reasons banks hold funds:
- Chargebacks: Consumers have up to six months to dispute a charge on their credit card statements. With this in mind, your acquiring bank has to protect itself. Therefor, it holds on to your funds – anywhere from six to 18 months – to pay off any chargebacks.
- Refunds: Compared to chargebacks, refunds are the lesser of two evils. But, just like chargebacks, your acquiring bank needs to hold your reserve to cover any refunds.
- Negative Balance: Banks will hold reserves in case your merchant account dips into a negative balance. Again, the acquiring bank needs to cover itself.
What to Do When Banks Hold Funds
Unfortunately, there is very little a merchant can do when banks hold funds.
Wendy Jacques, Sales manager at Instabill, said many banks will make a payout of 60 percent of the reserve after six months. After a year, the merchant might see another 60 percent of remaining funds, and then the balance of the reserve after 18 months.
Some banks do this. Not all.
“The best thing to do is not get into this situation,” said Ms. Jacques. “We cannot emphasize enough how merchants need to read their contracts thoroughly.”
Has your merchant account been shut down? We’re curious to know how you reacted and what you did thereafter. Leave your comment below.