Be Aware Paypal and Square May Freeze Your Business Funds

Imagine you are the owner of a popular restaurant. You are in the middle of another busy Saturday night when the unthinkable happens. No, the dishwasher did not break down, but something much worse has brought your bustling restaurant to a standstill.

Your credit card machine has stopped accepting transactions.

The machine itself is not the issue; it is running a flawlessly as it ever has. What happened is a company such as Square has started to hold your funds in reserve to limit financial losses when dealing with merchant disputes. Although Square has received a petition signed by more than 1,600 business owners and operators, the company is not the only credit card processor that has dealt with increased scrutiny recently for holding as much as 30 percent of a merchant’s funds.

Square’s Actions and the Pandemic

The Wall Street Journal reported that Stripe, PayPal, and Worldpay have also started holding funds to limit the losses generated by credit card transactions. One of the primary reasons for the new cautious approach to dealing with businesses stems from the negative economic impact of the COVID-19 pandemic. The pandemic has produced a rapid and substantial increase in the amount of losses taken by some credit card processing companies.

For example, in the first quarter of 2020, Square experienced financial losses because of credit card transactions that jumped by nearly 300 percent from the first quarter of 2019. Holding more money in reserve to pay for credit card processing losses protects companies from taking financial hits because businesses have closed because of the result of government-mandated shutdowns.

Square mostly works with smaller businesses that cannot operate unless they have full access to their credit card processing funds. In our restaurant example, the razor-thin profit margin of the industry makes it nearly impossible for the owner to remain open if a company like Square withholds a significant amount of money to take care of credit card processing issues. If Square continues to hold around 30 percent of merchant accounts, many of the businesses might have to close operations.

Why Some Credit Card Processors Freeze Business Accounts

As the best-known debit and credit card processor that has started holding more funds in merchant accounts, PayPal has a few automatic criteria in place to limit or even freeze merchant accounts. Chargebacks and a poor financial status are the two main reasons PayPal limits or freezes merchant accounts.

Chargebacks

Businesses strive to keep chargeback rates as low as possible to remain in good standing with credit card processing companies. If a business has earned the reputation for having a chargeback rate that exceeds the industry average, some processors such as PayPal begin implanting measures that financially punish the business. Chargebacks have dramatically increased since the start of the pandemic because a growing number of consumers face serious financial distress issues.

Poor Financial Status

A dramatic increase in a business’ chargeback rate leads to financial problems that include gaining a reputation for not meeting the financial obligations expected by a credit card processing company. Sometimes, merchants enter business relationships with processors knowing their chargeback rates have started to rise. A poor financial status either turns credit card processors away or the companies establish stricter policies by holding more money or freezing merchant accounts.

Here are some other reasons why a processor like PayPal limits or freezes merchant accounts:

• The business has an abnormally large amount of money in a merchant account
• Account information not current
• Website content that has drawn consumer complaints
• A growing number of consumer complaints about a business
• Violation of the credit card processor’s terms of use
• Low credit score

Devastating Financial Impact

Why do some businesses decide to take the financial abuse handed out by processors like Square and PayPal? The answer is the business owners believe their financial status makes it unlikely for them to enjoy a professional relationship with a reputable credit card processing company. The result of having money limited or frozen in a merchant account is most businesses start to bleed red ink in their profit and loss statements. Smaller merchants, such as the ones that work with Square, increase their exposure to financial risk. It can be crippling for smaller businesses to be held financially hostage by credit card processors that limit or freeze merchant accounts.

New businesses often work with these types of credit card processors because the owners believe they are not financially eligible to work with a reputable company such as Double Helix Processing. However, opening a traditional merchant account with Double Helix involves completing a simple process that does not hurt your business financially.

Why Your Business Should Open a Traditional Merchant Services Account

By far the most important reason for your business to open a traditional merchant account is to prevent a processor such as Square or PayPal from holding your business hostage. The last thing a smaller business needs is to have an already razor-thin profit margin turn into steep financial losses. Not only do you lose access to much-needed funds, but you also lose credibility with your customers.

Here a few other reasons why you should sign up with a traditional credit card processor:

• Grow your customer base
• Increase the speed of credit card transactions
• Build the type of trust that develops loyal customers
• Reduce fraudulent chargebacks

A traditional merchant account like the one offered by Double Helix provides businesses with advanced reporting metrics that are developed using web-based analytic tools. You receive an immediate look into each sale made, as well as the status of every payment. Do your business a favor today by opening a traditional merchant account with a reputable credit card processor.