Merchant Account Holdback Explained:
What is a Holdback? A merchant account “Holdback” is a portion of money held by the processor from a merchant’s credit card sales for the purpose of establishing a Cash Reserve. Processors may establish Holdbacks for new merchant accounts when businesses have poor credit history, or with existing accounts that engage in sales that have a higher than normal risk of Chargebacks and/or fraud. The funds from Holdbacks are held to cover the losses processors suffer when merchants becomes insolvent and have excessive Chargebacks or fraud on their account.
The most common method for establishing a Holdback is for the processor to hold 5%-10% of each sale that passes through the merchant account. In some cases, a Holdback will be discontinued once a Cash Reserve of a specified dollar amount is reached. In other cases, a Holdback can remain indefinitely to maintain a “Rolling Reserve.” The funds from a Holdback can often be held for as long as 180 days before being released to the merchant.
Holdbacks are often established suddenly and by surprise to the merchant, with funds being held before the merchant can react. This practice, combined with a long holding period, causes many merchant great confusion and frustration. It is not surprising that many of the complaints against merchant account providers can often be traced to Holdbacks that the merchant did not expect.