Your merchant account's been shut down -- now what?

By Halina

Having a merchant account is a critical component of any successful business. Unfortunately, a merchant account can also be shut down by its provider, resulting in your business losing out on potential customers and sales. Providers will often shut down a merchant account if they suspect fraud. However, even in cases where there is no fraud, such an issue may still occur.

There are several reasons why a merchant account can be shut down.

• Large ticket size. When a business applies for a merchant account, it declares the average ticket size (i.e., monetary transaction) that it expects to generate. If your business suddenly starts generating tickets in excess of this amount, your merchant account may be closed and funds withheld.
• Higher processing volume. Your business also declares its expected processing volume. If your processing volume suddenly increases, your merchant account may be shut down. One exception to this rule is if seasonal trends such as holiday shopping can explain the higher volume.
• Chargeback ratio. A merchant account that accumulates too many chargebacks may be shut down by the provider, regardless of whether the chargebacks are won or lost. In the case of Visa and MasterCard, merchants are required to maintain a chargeback ratio no greater than 2 percent of all transactions. A provider may see the high number of chargebacks as an indication that the goods and services being sold are not the same as those declared on the merchant service agreement.
• Unpaid fees. Businesses are charged a daily processing fee, known as the daily discount, on each credit card purchase. The daily discount is subtracted from the net deposit that is made at the merchant's bank. Other fees and charges are withdrawn from the merchant's bank account on a monthly basis. If there are insufficient funds to cover those monthly fees and charges, the merchant account could be closed.

How to reopen a closed merchant account
In many of these cases, the business has made an innocent mistake that has resulted in its merchant account being shut down. In some cases, the business may even find itself placed on the terminated merchant file (TMF), which is a blacklist of businesses that have had their merchants accounts negatively terminated. If a business is listed on the TMF, it will not be easy to reopen the account. However, it is not impossible.

If your business finds its merchant account shut down, you should first contact the provider to clear up the issue. This may require several lengthy phone calls, and you will probably be transferred to several departments before reaching a knowledgeable party. Occasionally, that party might be the processing bank or risk department.

At this point, you should find out why the account was shut down and try to rectify the situation. If the account was closed due to missed payments, then those fees must be paid. If a high chargeback ratio is the culprit, it may take some time for that problem to be cleared up.

If you cannot reach an agreement with the provider after several weeks, legal action may be required. Providers will often settle out of court through a system called arbitration, where both parties agree to avoid going to court. Arbitration is a much easier and less expensive method for reopening closed merchant accounts than conducting extensive legal proceedings.

Published: June 14, 2010