My Biggest Concern After Choosing Square to Process Payments

I ultimately recommended Square for my husband’s brewery, Nocturnal Bloom. But my suggestion came with a caveat.

Square checks most of our boxes. However, online comments about merchant account holds sparked some concern. It wasn’t enough to convince us to choose a different POS system. That said, it’s something businesses considering Square should be aware of.

» MORE: Read our full Square review

What is a merchant account hold?

A merchant account hold happens when your payment processor withholds the money your business has processed in card transactions. You can continue to process card transactions, but you won’t have access to the funds in your merchant account until the issue is resolved.

A merchant account freeze takes the situation a step further. During a freeze, your payment processor withholds your business’s funds and cuts off your processing capabilities.

How long does a merchant account hold last?

The duration of a hold or freeze is hard to predict, but can last anywhere from days to months. It depends on your processor and the severity of the issue at hand. Some processors, for instance, say they can hold funds for up to six months.

Are merchant account holds more common with Square?

Merchant account holds aren’t unique to Square. Instead, it’s an inherent risk you take with all payment service providers (PSPs). These types of payment processing companies (e.g., Square, Stripe, PayPal) combine multiple merchant accounts into one aggregate account. Alternatively, individual merchant account providers, like National Processing, dedicate one account to each business.

Individual merchant accounts may take longer to set up and often require more vetting. However, they’re often more stable than accounts provided by PSPs. Before you even start accepting transactions, an individual merchant account provider already knows what types of items you’re planning to sell and how your business works.

This isn’t necessarily the case for PSPs. Since the application process is so simple, the processor might not fully understand the risks associated with your business until you start processing transactions. On top of that, their tolerance for risk is generally lower. A pool of multiple businesses’ accounts is more vulnerable to fraud than a single business’s account. That means a PSP is quicker to flag potential issues. This, in turn, can lead to more holds or freezes.

Why do processors withhold money?

The following scenarios can set off merchant account holds:

• Customers request chargebacks. Frequent chargebacks may trigger merchant account holds, because they suggest the items you’re selling aren’t legitimate or as described. You can avoid chargebacks by having clear return policies and making sure your item descriptions are accurate.  

• You’re selling items you didn’t disclose. If you branch out into a new industry without alerting your processor, it might catch them off guard. Before you start selling those new products, let your payment processor know your plans. That way, they may be less likely to flag your account for fraud. 

• You start selling high-risk products. Square, for example, doesn’t support sales related to membership clubs, credit repair agencies, telemarketing agencies or weapons dealers, among other high-risk industries. If you plan to venture into a high-risk industry, it’s best to work with a high-risk merchant account provider. 

• Your sales volume surges. Unusually large transaction amounts or volumes may raise eyebrows. If you anticipate a significant influx of business, give your payment processor a heads up. This is especially important if you think you might exceed the monthly processing volume you initially agreed to. 

• You violated your agreement. When you sign up with a payment processor, read the entirety of your contract to understand what types of sales the company prohibits. Additionally, ask your processor what you can do to minimize your risk before you run into problems. 

In other cases, your processor may preemptively hold a particular percentage of your funds at all times. This is called a reserve. It’s meant to cover potential expenses associated with risks like chargebacks.

Reserves are typically implemented if your business is more likely to experience chargebacks or fraud. Square, for example, has said it puts reserves on 0.3% of its sellers for being considered higher risk. Before signing up with a processor, ask if they’ll put a reserve on your funds. Avoiding reserves is always ideal, since they can interfere with cash flow.

» MORE: What businesses should know about chargeback fraud

What do you do if your funds are frozen?

Don’t wait to get in touch with your processor if you notice something’s off or your funds aren’t arriving on time. Start by reaching out to the company’s customer support team or your dedicated representative. Ask why your funds are being held and what your processor needs from you. Are they missing a particular document or piece of information? Get the requested documentation back to them as soon as possible and follow up often.

If the situation becomes prolonged and you’re not reaching a solution, you might hire a third-party company that specializes in payment strategies. They can help you audit your business, identify the issue and work with your payment processor to release your funds.

In the worst case scenario, your payment processing capabilities are frozen entirely. If the issue isn’t immediately resolved, consider signing up with another payment processing company. That way, your business can continue processing transactions in the meantime. You might also apply for a business line of credit, so that you can continue paying your bills.

Is Square still worth it?

In my opinion, yes. Square is one of NerdWallet’s top POS systems for a reason. It has competitive processing rates, relatively inexpensive hardware and an easy setup process. Plus, its POS software plans are some of the most reasonably priced on the market.

Since Square’s barrier to entry is so low, it felt like a safe investment for a brewery like ours that’s only serving beverages. And as is the case for most new businesses that haven’t opened yet, cost is top of mind right now.

Another selling point is the fact that Square is an all-in-one solution. Lots of individual merchant account providers sell third-party POS systems instead of bundling POS and payment processing services together. It felt more convenient to go with a PSP, like Square, as opposed to working with two different companies.

That said, I understand PSPs, such as Square, come with their own risks. I think the best way to deal with them is to be proactive and communicative. For example, I plan to let Square know ahead of time if we start selling non-alcoholic beverages that contain CBD, which some processors consider high risk. The same goes for if we have a busy season coming up or we process an unusually large transaction.