Why Do Payment Processors Freeze Accounts?

When payment processors freeze your account, it's likely because they see signs of potential payment fraud.
May 16, 2022

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When a payment processor freezes your account, everything stops: You can no longer process credit cards and or access settlement funds until the freeze is resolved. These disruptive freezes can be triggered by transaction patterns that appear suspicious, such as higher-than-average transaction amounts or frequent chargebacks. You can typically get these freezes resolved by providing any information your processor requests — but you’ll also want to figure out what went wrong so you can avoid ending up in the same situation again.

Here’s what to know about frozen accounts, what can trigger freezes and how to avoid them in the future.

Payment processors’ responsibilities

Payment processors must comply with credit card network operating regulations and federal law, which put them on the hook for certain unauthorized charges on stolen credit cards, money laundering schemes and other types of fraud. Allowing fraudulent transactions to go through can result in violations and fines for processors.

“We don’t have any flexibility on what we are required to uphold,” says Angie Dobbs, vice president of risk and fraud with Wave, a payment processing company. “Sometimes if we detect something that’s off, it’s actually our requirement to protect our business, to protect our customers and to meet the regulations that are set forth by U.S. and Canadian regulatory bodies, the banks and networks.”

A frozen account doesn’t mean the processor has determined you’re at fault; they’re just pausing transactions to investigate what’s going on.

“We know how scary it is when we have to reach out and say we’re holding your funds until we feel that it’s safe to proceed,” Dobbs says. “It’s a really difficult conversation to have.”

What payment processors are looking for

Customer fraud

Customer fraud can occur at various stages of the payment process. A few examples of how consumers defraud merchants include:

  • Using stolen credit card information to make a purchase.

  • Testing a list of stolen credit card numbers on a merchant's website to see which are approved and still usable, costing the merchant money in processing fees.

  • Requiring a merchant to open an account with a specific payment processor to process a large amount on what turns out to be a stolen credit card.

Merchant fraud

Merchant fraud occurs when fraudsters open payment processing accounts with the intention to process illegal transactions or violate processor agreements. This can happen when a merchant:

  • Sets up an account under a stolen identity to avoid being identified.

  • Sets up illegitimate storefronts to accept payments but never fulfill orders.

  • Opens a payment processing account for a low-risk business while actually running a high-risk business.

Because some merchants are able to create accounts with fraudulent information and get through the onboarding process, payment processors continue to monitor activity after approval for any red flags that pop up when transactions are being processed. Each new transaction provides new data for them to analyze for potentially fraudulent behavior, says Dobbs.

This is why you might make it through the onboarding process and be approved for an account but be flagged for investigation after you begin accepting transactions. It’s not that the payment processor changed its mind about your approval — it’s more likely that something about those first transactions flagged its system and it wants to ensure no one, you included, is being scammed.

Why your business might have its account frozen

Your activity resembles that of a fake merchant

Merchant fraud occurs when a fraudster opens a merchant account using a fake identity. Because they’ve already developed credit with the identity and are able to answer all of the payment processor’s verification questions, a processor assumes the merchant is legitimate. However, fraudsters can use these merchant accounts to process stolen credit card numbers and run transactions that don’t fit the business model they were approved to operate.

Your transaction amounts are too high

Payment processors expect businesses to process transactions within certain price ranges, depending on the industry or types of products a business is selling. If a business begins processing transactions that are higher than that of the average business within the given industry, this can be a sign of a business either selling a different product than it originally applied to sell or processing stolen payment methods.

Your transaction details aren’t adding up

Processors are constantly looking for activity that doesn’t fit the template of an average consumer. For example, if you’re processing transactions on multiple credit cards with the same physical address, there’s a high chance that the credit cards are stolen. The payment processor might freeze your account while it investigates the charges to determine if they are legitimate and to ensure that you aren’t involved in fraudulent activity.

You’re getting a lot of chargebacks

A business that is constantly getting chargebacks is a liability for payment processors. Because consumers can request a chargeback as much as 60 days after a transaction — and up to 120 days in some cases — processors see frequent chargebacks as a signal that something isn’t quite right and want to hit pause on transactions until they can figure out why a company is having so much trouble.

How to avoid having your account frozen

While small businesses can’t avoid fraud altogether, they can implement practices and take steps to ensure they are on the same page as their payment processors to minimize the risk of having their accounts frozen.

Make your e-commerce checkout more secure

If possible, use any fraud tools that are available through the e-commerce platforms you already pay for, such as having a code texted to a cell phone or a temporary password sent to an email address, says Kimberly Sutherland, vice president of fraud and identity strategy at LexisNexis Risk Solutions, a technology company that focuses on reducing risk. “Being able to link that transaction back to a user is the way that a lot of businesses try to reduce some of that risk,” she says.

Don’t process a transaction larger than your limit

If your processor places a limit on how much you can process in one transaction, don’t try to process a larger amount. If your business will be regularly processing more than your transaction limit, talk with your processor about increasing your limit.

Notify your processor in advance of large transactions

Letting your payment processor know in advance that you’ll be processing a transaction that’s larger than your usual amount gives it time to ask questions and verify information. By being proactive, you lessen the chance that your processor is going to flag your account for suspicious activity, says Dobbs.

Try to spot potential fraud before accepting payments

Some fraudulent customers will try to get away with multiple purchases if they can. Look for red flags before you accept payments. “Are you seeing the same device come across with multiple payment instruments or the same address is being used across multiple payment types?” asks Sutherland. “Being able to really pay more attention to the frequency of that identity appearing or aspects of that identity appearing is a really effective approach.”

Reduce chargebacks

You can’t avoid all chargebacks because some of them might be legitimate, like when a customer’s credit card number has been stolen and used at your business. But minimizing the frequency of chargebacks can potentially avoid a sudden freeze on your account. You can reduce chargebacks by offering return policies, responsive customer support and clear information about when items are shipped and delivered.

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