Revenue Hold? Can a Processor Really Withhold My Money?
A revenue hold is one tool that a payment processor may use to insulate themselves from the risks posed by dubious credit card transactions. All businesses must carefully balance risk in relation to profitability, and acquiring banks and processors aren’t exceptions.
If a transaction seems iffy, processors reserve the right to put off paying the merchant until the situation is more secure. This distinguishes a revenue hold from an authorization hold; the latter is just a standard practice in card processing, while the former is a process to protect the bank against fraud losses.
As go-betweens that handle the processing of credit, debit, and gift card payments, processors take on certain risks with every new merchant. Revenue holds are one of the least-intrusive steps processors can take if they may stand to lose money. Such moves can mean real trouble for the merchant, though.
Processing: A Risky Business
Much like consumer credit card accounts, merchant accounts are considered a line of credit. When a cardholder makes a purchase, the issuing bank makes the payment on that person’s behalf, with the understanding that the cardholder will repay the bank at a later date. By the same token, processors normally pay merchants before the funds are collected from customers. Again, there’s the understanding that the money will follow.
If the customer fails to pay the issuer, however, the bank may not pay the processor. Since the merchant has already been paid, the processor ends up accepting the loss. Too many of these losses would put a processor out of business. This is why providers thoroughly research potential clients and often put risk-mitigation measures in place beforehand.
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It’s important to note that a revenue hold is different from an account reserve.
To offset the possibility of loss, the processor may insist on an upfront reserve fund from the merchant. This is particularly true for a high-risk account; one where the particular market or business model increases the chances of chargebacks. In these situations, the reserve is actually a prerequisite for obtaining the merchant account.
In contrast, a revenue hold is generally in response to a specific event. Even if the original contract did not require an ongoing reserve, most merchant processing agreements allow for the bank to hold additional funds based on circumstances. In other words, the processor may not feel the business is particularly risky but reserves the right to act on a particular transaction.
How Revenue Holds Work for Processors
Obviously, transactions in which the processor loses money are the exception, not the rule. That said, even a single bad transaction can raise red flags. If the bank or processor believes that a transaction looks suspicious, they’ll implement a revenue hold.
These risky transactions largely stem from three main sources:
- Merchant Actions
Chargebacks play into all these scenarios. Cardholders have a large window in which to dispute a charge; 120 days, in most cases. Thus, there’s a good chance the processor will have already made a payout to the merchant prior to receiving a chargeback on a sale.
A merchant could go out of business weeks or months before the processor even learns of a dispute. A merchant could also use an account to commit fraud against cardholders or even attempt to make money from fraudulent transactions and skip town.
Understanding that, it’s easy to see why a processor might be hesitant to pay on any transaction that seems a bit shady, particularly if it involves a high-ticket purchase. A revenue hold in and of itself isn’t the biggest danger here.
Merchants Have More to Lose
The processor or acquirer may hold off paying the merchant if they suspect the issuing bank won’t process a transaction. The hold will be in place until they’re reasonably certain they won’t be liable for the cost of a failed transaction.
If the amount withheld were simply the amount of the transaction, this would be little more than an annoyance. Unfortunately, the processor will almost always place a revenue hold on the entire batch amount. That means a merchant might not be able to collect on an entire day’s worth of sales. The hold could tie up thousands of dollars in transactions over one suspicious charge for $5.
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The length of time the merchant will have to wait for payout will vary. In some cases, the merchant may be able to contact the processor, show evidence that a flagged transaction is legitimate, and get the hold lifted. If the processor suspects merchant fraud, though, the situation will be quite different.
The Question of Fraud
Processors are constantly on the lookout for any sign that a merchant account is being used for fraudulent activity. In cases of suspected fraud, there will be a hold on funds pending a credit card fraud investigation. If they find evidence of fraud, the account is almost always terminated.
If they find no sign of fraud, the processor releases the account hold. That could take time, though. Plus, while there are some restrictions from the card network, it’s not unusual for a processor to withhold revenue up to 180 days for cases involving a perceived security issue or merchant fraud.
In the meantime, the normal day-to-day aspects of the business continue to go on. Inventory gets purchased, vendors need to be paid, and refunds still get issued when customers request them.
Clearly, not having access to funds has the potential to cripple a business. Worse, if the processor sees a trend of increasing risk, or suspects merchant fraud, they may simply close the merchant’s account.
Fighting Back Against Revenue Holds
If you experience a situation where funds are being held or a regular deposit isn’t received, take action right away. It could be a glitch, but never assume that it is. Reach out to your account representative or the processor’s service department immediately. Find out what’s causing the issue, and see if you can resolve any misunderstanding.
Of course, taking action to prevent revenue holds is the best option whenever possible. Educate yourself on events that may trigger a hold, and be proactive in avoiding those situations.
For example, trying to push through a transaction that is considerably larger than normal for your business is a huge red flag for processors, as is a sudden increase in sales volume. If you do have a legitimate large sale to process or operate a business with seasonal sales surges, contact your processor beforehand and give them a heads-up.
Excessive chargeback volume often leads to revenue holds and possible account termination. A proactive, multi-tiered strategy can lower chargeback numbers, reduce the risk of holds, and help win back revenue. To learn more, contact Chargebacks911 today.