Square Will Hold Your Money
Thanks to its convenient setup and ease of use, Square (also referred to as “SquareUp,” “Square Up,” or “the Square”) has become a dominant player among the top mobile payment processors. This convenience comes at a cost, however, as the company skips traditional underwriting procedures in order to offer its no-frills application process. This policy has resulted in an explosion of merchant complaints related to Square holding funds and sudden account cancellation by Square’s fraud prevention team. To compound the issue, Square does not appear to have the customer support apparatus in place to respond quickly or effectively to merchant concerns.
Prevent Square From Freezing Your Account
In order to receive your money on time and avoid dealing with Square customer support, you should take steps to prevent Square from freezing your account in the first place. But what are those steps? We’ve covered them below.
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Best Six Ways to Avoid Square Holds
1. Understand Square’s Reserve Policy
The Square legal agreement is clearly provided on the company’s website, but it takes some digging to get to the most important information in this document. Article 13 of Square’s Payment Terms (excerpted below) describes the Square reserve policy.
Square’s “Reserve for Holding Funds” Policy
We may withhold funds by temporarily suspending or delaying payouts of Proceeds to you and/or designate an amount of funds that you must maintain in your Square Accounts or in a separate reserve account (a “Reserve”) to secure the performance of your obligations under any agreement between you and Square. We may require a Reserve for any reason related to your use of the Services. The Reserve will be in an amount as reasonably determined by us to cover potential losses to Square. The Reserve may be raised, reduced or removed at any time by Square, in its sole discretion, based on your payment history, a credit review, the amount of any arbitration award or court judgment against you in Square’s favor, or otherwise as Square or its processor may determine or require. If you do not have sufficient funds in your Reserve, we may fund the Reserve from any funding source associated with your Square Accounts, including any funds (a) deposited by you, (b) due to you, or (c) available in your bank account, or other payment instrument registered with us. You grant us a security interest in and lien on any and all funds held in any Reserve, and also authorize us to make any withdrawals or debits from the Reserve or any bank account linked to any of your Square Accounts, without prior notice to you, to collect amounts that you owe us. You will execute any additional documentation required for us to perfect our security interest in any funds in the Reserve. This security interest survives for as long as we hold funds in your Reserve.
To summarize, Square reserves the right to suspend or delay payouts to you at its sole discretion, for as long as it deems necessary. The agreement is so extreme that it allows Square “to make any withdrawals or debits from the Reserve or any bank account linked to any of your Square Accounts, without prior notice to you, to collect amounts that you owe us.” This provision is not listed or described prominently in the company’s standard advertising materials, but is responsible for nearly all Square merchant complaints about holds placed on funds.
Keyed (Card-Not-Present) Processing Limit
Until November 2013, Square enforced a processing limit on card-not-present transactions. The company would allow a merchant to process up to $2,002 in manually entered (non-swiped) transactions during any rolling seven-day period. Any amount above $2,002 that the merchant processed would be placed in a reserve fund for 30 days before being paid out to the merchant. Square provided no warning when merchants were nearing their $2,002 limit, which meant that merchants often exceeded it without knowing. Square has since eliminated this policy, and the company now claims that merchants can process any transaction type or amount without having to worry about a processing limit. However, this does not mean that the company has stopped holding funds.
The Algorithm Rules All
The current reserve policy operates with a greater degree of unpredictability because there is no explicit limit set on the account. Square’s reasons for withholding money (and methods for calculating the proper amount) now boil down to undisclosed algorithmic risk factors. There are numerous reports of Square’s automated systems placing sudden, long-term holds on merchant funds without any clear way for a merchant to release the funds. Many merchants report holds being placed on perfectly legitimate swiped transactions. This policy is one of the most worrisome aspects of Square’s service at this time.
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2. Ensure Your Business Type Is Not Restricted
Square does not allow certain high-risk or illegal business types to use its service. However, Square’s simple signup process does not screen out these businesses ahead of time in many cases. These merchants are allowed to process payments freely until Square’s fraud prevention team determines that the merchant’s business type is restricted, at which point Square usually freezes the account. This leaves the business owner twisting in the wind while they await a final ruling from Square’s customer service team.
Square May Not Be the Right Fit for You
Until Square establishes a rigorous screening process, merchants can avoid this scenario by checking their business type against the Square service agreement, which lists restricted business types. We have also included this list below as a convenience. If your business operates in one of the following industries, you may be better served by a high risk merchant account specialist.
List of Square Prohibited Business Types:
(1) any illegal activity or goods, (2) paraphernalia that may be used for illegal activity (3) buyers or membership clubs, including dues associated with such clubs, (4) credit counseling or credit repair agencies, (5) credit protection or identity theft protection services, (6) direct marketing or subscription offers or services, (7) infomercial sales, (8) internet/mail order/telephone order pharmacies or pharmacy referral services (where fulfillment of medication is performed with an internet or telephone consultation, absent a physical visit, including re-importation of pharmaceuticals from foreign countries), (9) unauthorized multi-level marketing businesses, (10) inbound or outbound telemarketers, (11) prepaid phone cards or phone services, (12) rebate based businesses, (13) up-sell merchants, (14) bill payment services, (15) betting, including lottery tickets, sports related gambling, casino gaming chips, off-track betting, and wagers at races, (16) manual or automated cash disbursements, (17) prepaid cards, checks, insurance or other financial merchandise or services, (18) sales of money-orders or foreign currency, (19) wire transfer money orders, (20) high-risk products and services, including telemarketing sales, (21) automated fuel dispensers, (22) adult entertainment oriented products or services (in any medium, including internet, telephone, or printed material), (23) sales of (i) firearms, firearm parts or hardware, and ammunition; or (ii) weapons and other devices designed to cause physical injury (24) internet/mail order/telephone order of age restricted products (e.g., tobacco), (25) occult materials, (26) hate or harmful products, (27) escort services, or (28) bankruptcy attorneys or collection agencies engaged in the collection of debt.
3. Anticipate Sudden Increases In Processing Volume
Although unexpected growth can be exciting for a business owner, it can also trigger fraud protection measures if it occurs without any prior notification to Square. According to many Square complaints, merchants are at risk for account freezes if their transaction volume increases dramatically and without warning. Square may interpret a sudden surge in payments as a sign that these payments are are fraudulent or subject to dispute by customers, regardless of whether they are legitimate transactions. Additionally, an inexplicable increase in transactions may also be an indicator that a merchant has started to operate outside of its stated business type.
Contact Square While You Still Can
As stated in its reserve policy, Square alone gets to make these assessments and establish a reserve of any amount at its own discretion. Merchants are advised to alert Square via its help center if they anticipate a sudden increase in transactions that deviate from their normal sales patterns. Examples of predictable increases may include periodic flea market participation, occasional trade shows, annual fund raisers, and other special events that are atypical of normal transaction behavior. If these events are common for your business, you might consider using a seasonal merchant account.
4. Monitor Your Average Ticket Size
Your average ticket size may fluctuate independently of your processing volume, but dramatic changes to either can affect Square’s funding of your sales. “Average ticket size” refers to the typical dollar amount of an average sale for your business, which Square seems to calculate over time as you establish a sales history. If your average ticket size suddenly increases, you may be at risk of being flagged by Square’s fraud prevention team.
Average Ticket Is Not the Same as Processing Volume
Average ticket size can fluctuate even as processing volume stays the same or decreases, so it can be difficult for merchants to monitor. For instance, if a merchant sells $1000 worth of goods through 20 sales of $50 in an average week, then that merchant’s average ticket size is $50. But if the merchant sells the same total amount of $1000 in an average week but through two $500 transactions, then that merchant’s average ticket size has increased by a factor of 10 out of seemingly nowhere. This sudden change in the typical sales amount would likely be interpreted as suspicious activity by Square risk assessment systems. Square is not a recommended merchant account provider for high volume businesses in general, so if you anticipate a sudden increase in your average ticket size, notify Square ahead of time.
5. Notify Square Before Processing Large Transactions
Sometimes you know ahead of time that you will process an amount well in excess of your typical High-Ticket history. In these cases, it is a good idea to contact Square and alert the company of an impending large transaction. These surges may be in relation to a large one-time event or a seasonal shift but it is always best to let Square know before it happens.
Help Square Understand You
By informing Square, you can help flesh out your processing profile with Square and help the company understand why a large transaction is occurring. In general, transactions over $500 are at risk of being flagged by Square, especially if you rarely charge anything over $100. If your business typically has high-dollar transactions, be sure to notify Square of that before you begin accepting payments and remain aware that anything that that greatly exceeds your normal high-ticket pattern may flag a hold.
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6. Prevent Chargebacks
A major cause of account freezes appears to be an increase in chargebacks for a merchant. Square will often establish a reserve account to mitigate fraud risk and to help pay for the associated costs of chargebacks. Square may increase the size of this reserve account and/or terminate your account if it anticipates future chargebacks.
Best Practices for Chargebacks with Square
There are several practices that can help merchants avoid chargebacks, such as disclosing all applicable fees; ensuring that the amount charged matches the price advertised to a customer; ensuring that their business name and address match those that customers will see on their statements; delivering goods or services in a timely fashion; and making it easy for customers to cancel any recurring billing. Failure to follow these guidelines may lead to customer confusion and provoke a chargeback. The procedure for contesting chargebacks can be strenuous, costly and convoluted. Merchants are strongly encouraged to avoid chargebacks whenever possible.
Beat the Machine
Now that Square has cancelled its keyed-in processing limit, it appears that algorithmic risk factors are the main cause of merchant holds. This means that you need to consider what will cause Square’s system to flag your account. By monitoring ticket sizes, sales volume, and chargebacks, can help you avoid a long-term, costly Square hold.
If you have any advice for how to prevent Square from withholding your funds, please share that information in the comment section below:
