Why Credit Card Processors Hold Funds

By Phillip Parker|July 16, 2018

A Breakdown of Merchant Account Funding Holds

In today’s digital age, where financial transactions are conducted with lightning speed, it’s puzzling to many businesses owners as to why credit card processors choose to hold onto the funds generated by their sales. This seemingly counterintuitive practice has left countless business owners and consumers alike scratching their heads, searching for answers as to why their hard-earned money sits in limbo for a certain period. This article delves into the intricacies of why credit card processors hold the funds of business transactions, exploring the underlying reasons, regulatory factors, and the delicate balance between risk mitigation and the need for seamless financial operations. Understanding this practice is crucial for businesses aiming to optimize their cash flow and navigate the ever-evolving landscape of electronic payments.

Limiting Risk

Credit card processors place holds on funds primarily due to risk. This risk comes in three main forms: merchants closing accounts while still owing fees, chargebacks, and fraud. But how do these things cause risk for processors?

Processors Can Get Hung Out to Dry

The answer is simple, really: merchant accounts are not depository accounts like checking and savings accounts. Rather, they are considered a “line of credit.” Think of it like this: When a customer pays with a credit card, a bank is extending credit to that customer and making the payment on his/her behalf. Additionally, processors pay merchants before the banks collect from customers and are therefore extending credit to the merchant. Essentially, credit card processing companies act as middlemen between banks and merchants and accept responsibility for issuing debits and credits between the two. As middlemen, they can be left holding the bill if a bank is owed money but they are unable to collect from the merchant.

A Common Chargeback Scenario

For example, imagine that a merchant charges a customer for a large purchase (either legitimately or fraudulently). Shortly after the transaction the merchant goes out of business, or if a fraudulent company, disappears to never be seen again. Later, the customer disputes the charge, thereby initiating a Chargeback (in many cases, customers have up to 180 days to dispute a credit card charge.). Since the merchant no longer exists, the processor must pay the bank using its own money because it can’t collect from the merchant. In fact, Chargeback scenarios are one of the most common ways that processors suffer losses; however, merchant fraud is also a great concern.

Fund Holds Protect Processors From The Worst-Case Outcome

In summary, credit card processors place holds on merchant funds in order to shield themselves from the risk of chargebacks, to avoid suffering losses due to merchants conducting fraudulent transactions, and to ensure that they can pay fees that may not be recoverable due to a business closing. Other significant risk factors for a processor include an inability to deposit or withdraw fees from a merchant’s checking account, potential losses posed by high-risk business types, and transactions where the probability for Chargebacks or fraud is higher than normal.

Bottom Line

Keep in mind that each processor may have its own policies regarding what types of transactions it will hold and when/how long it will place holds. Some processors handle these situations well and others do not. If you feel that you are at a higher risk of experiencing holds, be sure to present your concerns with the processor prior to setting up an account.

About Us

CardPaymentOptions.com

Established 2009

This website was launched in 2009 as a modest blog dedicated to exposing questionable marketing and pricing practices within the credit card processing industry and how they negatively impact small business owners. What began as a side project has since evolved into a widely recognized platform advocating for transparency, accountability, and ethical standards in merchant services.

As Has Appeared In

About The Author

Phillip Parker

Founder & Creator

Since 2009, I have researched over 1,000 merchant services providers and published hundreds of payment education-related articles. This work has received national recognition, and my expertise in payments is regularly sought by large media outlets such as CNN, MSN, and INC Magazine, among dozens of others.

Shortly after graduating from college, I was recruited into a sales role with a credit card processor. Only later did I realize that the so-called "training" centered on selling expensive processing agreements... layered with hidden fees and long-term contracts. In my earliest transactions, I unknowingly steered friends and family into costly arrangements after they trusted my recommendation. When I fully understood the structure of what I had been selling, I resigned immediately and committed myself to exposing those practices. That commitment became the foundation of this website.

How We Generate Income

We take our role in providing guidance and education regarding the card payment industry very seriously. We also demand transparency from the companies we review, so we want to be tranparent with our readers as well.

At our own expense, we have vigorously defended our right to continue to expose unethical and predatory practices in the payments industry. A right that unethical operators have repeatedly attempted to suppress. To sustain these efforts, one of the ways we generate revenue is through affiliate partnerships with ethical providers who have a long history of treating small businesses with respect. This means that some of our outgoing links connect business owners to trustworthy, low-cost payment processors.

Our priority is to guide you to the best solutions for your needs, regardless of potential revenue. If you have questions, please feel free to contact us.

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