Why Was Your Merchant Account Shut Down?

Running an e-commerce business can be an exciting and rewarding experience for entrepreneurs, but it’s not without its challenges. One of the fastest ways for your business to be in trouble is to suddenly not be able to process credit card payments, and this can happen quickly if your merchant account gets shut down. There are numerous reasons why a payment processor might shut down an account, but the following are some of the most common reasons.

High Chargeback Rate  

Chargebacks can be one of the biggest challenges for merchants in terms of potential losses due to fraud, but they’re also the most common reason why a payment processor will shut down an account. A chargeback is a mechanism by which a customer can request a refund directly from their card issuer for an alleged erroneous charge. In these kinds of disputes, card issuers tend to give the customer the benefit of the doubt, so this means that the merchant takes the financial hit unless they can prove the legitimacy of the sale. 

As unpleasant as one chargeback is, it only really becomes a problem when there are multiple incidents and they start to accumulate. Payment processors operate based on the 1% rule: up to 1% of a merchant’s transactions can be chargebacks. Beyond that, most processors will immediately shut down a merchant account in order to eliminate the perceived risk that comes with a merchant who has a lot of chargebacks. 

Too Much “Risk”

Along the same lines, payment processors will also be willing to shut down a merchant account (or refrain from opening it in the first place) if they feel that the merchant brings too much risk. There are a variety of reasons why a processor’s perception of a merchant’s risk might change, but one example is a change in products or services. If, for instance, an online business had been selling small electronic products with relatively low dollar value (a generally low-risk business model) and decided to start selling high dollar value digital products (where delivery and receipt of the product is much harder to verify), the payment processor might decide that the risk is now too high to maintain the merchant account.

Too Many Refunds

While the dangers of chargebacks have become more well known to merchants, another type of transaction that can raise a red flag for processors is the number of refunds. From the merchant’s perspective, issuing an occasional refund is a proactive way to maintain customer satisfaction. But to card issuers and payment processors, too many refunds can signal that the merchant is not adequately meeting their obligations; as a result, they have deemed a higher risk and can be subject to a merchant account shut down.  

Suspicious Activity

The payment processing industry thrives on countless transactions being processed every day with no wrinkles; for this reason, processors monitor transaction activity constantly for signs of suspicious activity that could indicate a potential problem or a breach of the terms of the merchant account contract. This might include a merchant having multiple accounts with different processors, or it might mean fraudulently processing transactions for products or services the processor isn’t aware of. Whatever the case, payment processors are vigilant in their effort to detect fraud and will shut down an account if any is detected. 

Forced Transactions

Mostly a factor for businesses that have some physical presence, forced transactions come about in situations typically where a credit card is declined. In these situations, the merchant can get a one-time authorization code (or in some cases of fraud, the code can come from the customer) that can be manually entered in order to force the transaction. While there are legitimate reasons why a bank might allow a transaction to go through in this way, too many of these kinds of transactions likely indicate either fraud on the part of the merchant or susceptibility to fraud from the merchant’s customers. 

Surpassing Credit Card Processing Limits

One of the basic elements of a merchant account application is an estimated monthly transaction volume. Merchants are responsible for making this estimate and then staying within it during the course of the year; similarly, merchants are also responsible for staying under a dollar value high ticket limit. In either circumstance, a merchant account that has exceeded these limits will raise a red flag with the payment processor. Exceeding these limits is perceived as risky by the processors in part because of the correlated risk of high ticket volume leading to greater chargebacks. 

PayCafe: A Processor Who Works With You

An unfortunate truth about maintaining an online business is that you could theoretically be doing all the traditionally “right” things and still find your merchant account shut down. This is why your selection of payment processor is critically important to the ongoing operation of your business; not all processors are the same, and not all processors will take the time to distinguish between a truly risky merchant and a great merchant who happened to have an abnormality. 

PayCafe’s driving force is to be a payment processor who gets to know your business right from the beginning of the relationship. By understanding your unique business needs and developing a relationship based on communication and transparency, you’ll be more likely to be able to keep processing transactions even if something unusual arises. For example, let’s say you go over your chargeback limit one month; PayCafe will talk with you and investigate the circumstances to find out why it happened rather than just immediately terminating your account. 

Additionally, PayCafe offers many features that can reduce the kinds of risks that can lead other merchants to grounds for a shutdown account. One example is the combination of chargeback defense and an early warning system that can alert merchants to a potential chargeback; by reducing the likelihood of chargebacks in the first place, the account will be much less likely to go over the limit. Ultimately, the relationship with PayCafe is about understanding who you are, how you operate and preempting the kinds of factors that can lead to a merchant account shut down.