Transaction Withholding

Can your processor withhold money?

You may not know it, but your processor can withhold settled funds from your merchant account. Depending on the size of your business, the processor may hold a few thousand dollars or several million. While in most cases the reserve account is created up front to cover for chargebacks, there are notable instances where the monies are held without notice, and the crimp in cash flow can cripple many small and medium sized companies.

Reason For Cash Reserve Accounts

Cash ReserveDuring the financial crisis many processors suddenly opted to start requiring reserves from customers who had not previously needed them. This is because many companies were going out of business and leaving processors on the hook for chargebacks. Therefore, their risk management functions kicked in and they suddenly informed many companies that in order to process they had to either make a payment up front, or wait until the charges in their account added up to a reserve, after which the remainder would be remitted. For some organizations this amount was set in the hundreds of thousands of dollars. Even in smaller cases, the required amount equals one or two months worth of credit card receipts, an amount which could stop the company from doing business.

Strategies for Disputing Cash Reserve Requirements

Some companies use publicity as a way to fight this requirement, but this often only works when the company and processor already have a history of doing business together. If you are getting a brand new merchant account, you are unlikely to prevail in such a case. Naturally, the fist step should be to contact the bank or processor to verify the amount of the reserves, and whether it is really necessary. Sometimes a cash reserve requirement automatically kicks in if there is suddenly a larger number of credit card transactions, chargebacks, or fraud indictors. High risk processing usually entails a reserve account as well. Communicating with banks is also important because this reserve could be held for a short time or as long as six months. If your business is planning an expansion, or will be ramping up advertising, then letting your processor know that volume is increasing may be a way to avoid cash reserve scrutiny. You may also need to share more of your financial documents in order to put the brakes on a cash grab. In any case, you should consult with your processing contract to find out the nature of any withholding or holdback provisions so you are still able to manage a positive cash flow.