Everything You Need to Know About Credit Card Processing Holds

Credit card processing holds happen for a number of reasons and can definitely be a nuisance when you are trying to run your business. Learning more about payment holds can help you prevent some holds and quickly prepare information to release a hold in the future.

Let’s start with the basics, there are two types of credit card processing holds, underwriting holds and risk holds.

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Underwriting Holds:

With some credit card processors the underwriting process takes two steps.

Step 1: You fill out an application online and an initial verification is done to make sure your business is a good fit for the payment gateway you’re partnering with (PaySimple or similar). If you meet the initial criteria, you can start processing payments. But take caution here because this does not mean you are fully approved yet.

Step 2: Further information (specific documentation) will be required to ensure that the payment processors are able to support your business type. Some businesses are considered higher risk and may not be supported by your payment gateway’s processing partners.

After you are approved for a merchant account (whether ACH or credit card) and start collecting payments from customers, you might find that you’re not receiving funds in the normal two-business day timeframe. When you investigate this, you might learn that you are on an underwriting hold.

What does an underwriting hold mean and what are the next steps?

You will be alerted to the hold and what documents you need to send to the processor to verify your business.

Typically, the processor will request:

An invoice, receipt or contract with your customer that proves the first few transactions you processed were authorized by your customer.

This process can be a little confusing but it’s important to understand that this verification process is necessary to protect against fraud. The easiest way to approach this step with your customer is to let them know about the process and what they can expect.

I’m not a fraudulent business, why do I have to undergo this authorization process?

Your business might not be a fraudulent, but fraud is out there everywhere. Everyone has to go through some scrutiny so fraudsters don’t slip through the cracks and gain access to sensitive information by pretending to be a real business. The system is in place and necessary to keep all consumers (including you!) safe from someone getting your secure credit card data and using it for fraudulent activity.

Okay, so what else happens?

Verification of your business details

The underwriting process is all about making sure all information you provide about your business matches what they see when they research your business. The processor will go through a series of due diligence steps on their end, here are two examples of what they might investigate:

Collect marketing materials from you (the more, the better)
Conduct research to find your business and verify its address

The processor is looking to make sure they minimize their own risk and that they are financially backing legitimate businesses. The easiest way to do that is through this underwriting process.

That makes sense, I like to make sure I know all of my customers before taking their payment information too. So once the processor verifies the proof of authorization for the transactions, is that it?

For the majority of businesses, after you provide the proof of authorization documentation and the processor verifies your business, your funds will be released and you should see them in your bank account the next business day. The easiest way to get through the underwriting process as quickly as possible is to be prepared and respond to questions promptly.

Risk Holds:

Has your bank or credit card company ever called you to verify a transaction? Maybe you were out of state, out of the country, or the transaction they are checking on ends up being something completely bizarre and unknown to you. This is an example of a risk hold. The Fund are being held from the merchant until they can verify the transaction. They exist to protect the consumer, which is all of us.

So what does it mean that my funds are being held?

Risk holds can be caused a couple of ways such as abnormal behavior from a customer (they are traveling or have never purchased from you before) or abnormal behavior from you, the merchant. A risk hold often occurs when you process outside of the initial limits you were approved for during underwriting.

Even though a processor might not know your business, they do try to establish typical behavior and they do this by asking your average transaction amounts and processing volumes.

For example:

If you are approved for an average transaction of $100 and an average monthly volume of $10,000 and you process a single transaction for $30,000 you might be put on a risk hold. This is why it is so important when you fill out your application to ensure you are submitting appropriate processing volumes and estimated amounts and to read all email communication from your payment partner.

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Risk holds can also occur by random audit and can happen when you:

Process a payment for more than six months in advance
Process multiple transactions for the same customer on the same card in a row
Have a high number of chargebacks associated with your account
Have an issue with your bank receiving the funds for your account

Risk holds can happen for a variety of reasons at any time during the life of your account. The processor tends to monitor account activity to make sure everything is running smoothly, and if they feel there is a pattern of unusual activity they may put your account on a hold until they get more information.

That all makes sense, what type of information do they request?

While not an exhaustive list, these are some commonly requested documents:

Proof of authorization of the charge just like in the underwriting hold, which would include a contract, invoice or receipt detailing your customer’s information and authorization for the charge.
- They will verify that the charge was authorized by your customer
They may also request two months of your most recent bank statements, proof of address such as a utility bill or lease agreement, marketing materials or a business license.

What is the best way to avoid a risk hold?

Great question!

Two Tips to Avoid a Risk Hold:

1 – Be transparent

The easiest way to avoid a risk hold is to be as transparent as possible about your business and make sure everything you do from the underwriting process, to everyday transactions, is within your normal processing behavior. If you are expecting a large transaction that is outside of your normal processing, it is good to have proof of authorization from your customer ready in case you are put on a hold.

2 – Get smart on processing

Another great tip is to be as knowledgeable as possible about what the processor expects your activity to be and the different ways your account can be flagged.

Make sure you are covering your bases by obtaining authorization for your charges, never collect for services provided more than six months in advance, and be familiar with your approved limits to ensure you are staying on track for your average processing volumes.

Note:

Make sure you have a contract or authorization with every one of your customers on hand to expedite any sort of hold process.

Any sort of funding hold can hurt your business by disrupting your cash flow, we encourage you to use the information in this article to help you avoid holds from happening.