Avoiding Merchant Account Issues When Banks Are Scared by COVID-19

May 31, 2022

Steps to Take to Safeguard Cashflow

If you own a business, there are clearly reasons for concern right now.

If you accept credit cards, there are a few HUGE additional reasons for concern.

There are also some simple steps you can take to gain back control, which I’ll get into.

First, it’s important to understand the major exposure that your business faces – as well as the banks that support your credit card processing (whether through a merchant account provider, Stripe, PayPal, or any other provider).

Simply Put: 

“Merchant Account Providers legally have the ability to hold your money, or close your merchant accounts without notice and without cause. During an Economic Crisis, they have an additional cause.“

In mid-March, 2020, one of the largest credit card processing companies in North America isolated FIFTEEN different industries and started holding 10% of their money moving forward.

How would your business be impacted if you lost 10% of your profit (on top of whatever revenue impact has already occurred)?

Here’s a snippet from the email that hit my inbox last week, announcing this:

“…many businesses will be affected and will not be able to provide the services that were paid for and may not have funds to cover the refunds due their customers…[as such] A number of merchants have been placed on a 10% reserve”

Effective immediately, one of the largest merchant account providers in the country is holding 10% of the sales from any business in these industries.

Below are the industries they are holding money from.

I want to be VERY clear though…  

Whether you’re on this list or not, there is still a HUGE cause for concern, which I’ll explain.

Those 15 industries are:

  • 4131 – Bus lines, including Charters, Tour Buses
  • 4722 – Travel Agencies
  • 5712 – Furniture, Home Furnishings & Equip Stores Excl Appliance
  • 5811 – Caterers
  • 6513 – Real Estate Agents and Managers-Rentals
  • 7011 – Lodging, Hotels, Motels, Resorts
  • 7298 – Beauty or Health Spas
  • 7832 – Motion Picture Theaters
  • 7922 – Theatrical Producers (excl Motion Pictures), Ticket Agencies
  • 7941 – Commercial / Professional Sports, Promoters, Athletic Fields
  • 7991 – Tourist Attractions and Exhibits
  • 7997 – Membership Clubs, Incl Sports, Rec, Athletic, Country, Golf
  • 7999 – Amusement/Recreational Services Not Elsewhere Classified
  • 8398 – Charitable or Social Services Organizations
  • 8699 – Membership Organizations Not Elsewhere Classified

The fact of the matter is; if you’re in one of these industries, you have already felt the wicked economic impact from cities, states and countries limiting the ability for businesses to operate.  (All assessment for the rationale of these actions aside)

And CLEARLY if you have a business in one of these categories, there’s a high level of certainty that your merchant account provider will take some kind of action, if they haven’t already.

But it’s the LAST category that should raise a flag for everyone else.

“Membership Organizations Not Elsewhere Classified

Does this include gym memberships? Magazine membership subscriptions? Online coaching? Netflix? I have a membership to a food delivery service company Instacart, is that included?

The short answer is: They all could be.

Here’s Why It’s a Concern for Every Business Owner

1.) Trends; General, Past & Present 

This behavior by banks isn’t unusual (sadly).

In fact, it happens all the time.  Merchant Account Providers contractually have the ability to hold your money or close your account at their discretion.

Two months, the FTC took issue with the marketing practices of a 100 Million dollar company.  The company wasn’t proven guilty of anything, but chose not to fight the government agency and closed their doors.

Over the next two months, we saw more than five different Merchant Account Providers impose reserves or close the merchant accounts for any business that was in the same industry.

These businesses in the same industry hadn’t changed anything in their individual operations – their Merchant Account Providers were simply being “proactive” when closing their accounts and decided it was risky to participate in that industry.

Humans look for patterns and build associations from them as quickly as possible.

The COVID-19 pandemic is evidence of this.  Each city, state, and country government is listening to the other government organizations and is influenced by their actions.

It happens with many things in life.

“For example, would you be more or less likely to invest in a stock that you saw Warren Buffet invest in? “

It’s no different with banks.  When a massive provider takes an action like this, other banks follow suit. 

Unfortunately, less than a week after the recent 15 industry “10% Reserve” incident, we got two additional notifications regarding their concerns related to the pandemic.  One of them immediately closed all merchant accounts related to “coaching and online courses.”

They were nice enough to offer a 7-day notice to these businesses. 

It’s worth noting that the category was not on the list above.

The point is, we have already seen banks start to make knee-jerk reactions based on other providers’ decisions. It will continue.

Unfortunately, it doesn’t *entirely* matter what industry you’re in and doesn’t have to be completely logical.

2.) Categorization  

The numbers you see on the left of the industries in the list above is an “MCC Code” (Merchant Category Code).

Example: 8699 – Membership Organizations Not Elsewhere Classified

Credit card processing companies (and many others) use these to group businesses together.  The major challenge; YOU don’t get to pick what MCC Code you are placed in. Your credit card processor does.

Have you ever filled out a form when they wanted you to pick from a list and you selected “other”?  Yeah, the people (or algorithms) setting up your merchant accounts do that too.

That leads to business often being miscategorized.

That means when providers make changes *based on these codes and not your individual business*, they’re likely to throw the baby out with the bathwater.

3.) Your Credit Card Processor Sees It As The Only Option

Wait, so why would they do something that would HURT my ability to process credit cards… and prevent them from making more money from my account?

It’s a good question.

What is the “risk” for merchant account providers?

(There are some caveats in what is below, but it will explain the basics)

Visa & Mastercard give every consumer six months to dispute any purchase they’ve made.  We call these “chargebacks”.

If a consumer disputes a purchase from your business, the first thing that happens is the money from that transaction is pulled out of your bank account.

Only THEN, do you (the business owner) have the ability to contest that dispute.  If you win, the money is redeposited into your bank account. If you lose, that money is given back to the consumer. Regardless, the number of chargebacks you receive is a concern for your provider.

Here’s why: If you don’t have money in your bank account (or your bank account is closed), your Merchant Account Provider (credit card processor) has to pay back the consumer.

To state it simply:  The risk for a merchant account provider is having to cover the cost of any fees that a business would normally pay – when the business isn’t able to.

Disputes happen for a wide variety of reasons that vary based on business models.

Here’s an example that is a major concern for businesses in the COVID-19 era:

Bob’s Real Estate Wealth Experts hold a seminar every 3 months to teach people how to invest in real estate.  Over the last 90 days, they’ve sold 200 tickets to their next event at $2,000 per ticket. Bob collected $400,000.

Bob has already spent most of that money.  He’s paid for the event space, he has high overhead with his payroll, office space, software and ongoing marketing budget.  Bob has been heavily reinvesting in his business (or maybe he’s just partying – who knows). Regardless, Bob definitely doesn’t have anywhere near $400,000 sitting in his bank account.

During any economic time, this model poses a higher than average risk of consumers wanting their money back, because the event is in the future.  Life happens and even if through no fault of Bob, there will be consumers that decide they want their money back – and will either request refunds, or dispute their charge if a refund isn’t given.

In THIS economic time, live events have nearly all been canceled, whether by government or discerning companies.

The likelihood of Bob’s consumers requesting their money back or disputing charges is very, very, high.  If Bob can’t pay for those refunds and disputes, his payment provider will have no choice but to pay for them.

As a result, any industry that has a likelihood of dispute (notice that I didn’t say individual business – but industry) will be scrutinized right now and will likely be hearing from their merchant account provider.  But it’s deeper than that.

The downstream effects…

Many businesses have already closed their doors permanently as a result of this pandemic.

The longer quarantine continues, the less money the consumers in the economy will be making and the less they will be spending, which in turn means lower revenue for many types of businesses.  For many businesses, this means they’ll be filing bankruptcy.

MOST merchant account providers collect fees at the end of each month.

Every time a business files for bankruptcy, it’s likely that the outstanding fees for their credit card processing will not be paid.  This is another concern for merchant account providers.

To be clear, 90% of the credit card processing fees a business owner pays are hard costs that your merchant account provider has already paid Visa / MasterCard.  So when a business closes its doors, the unpaid credit card processing fees become real losses for the merchant account providers.

How to Protect Your Merchant Accounts During Economic Challenges (and COVID-19)

1.) Use The Right Providers

Of the thousands of merchant account providers out there, roughly 1% focus on eCommerce companies or business models where the card isn’t physically swiped (meaning it’s entered over the phone or online).

The other 99% operate very much like PayPal & Stripe and have a significantly higher likelihood of holding your money.

It’s not fundamentally good or bad, it’s just how their model works.  They approve you with little or no underwriting, so when they have a concern, the only course of action for them is to hold your money or close your account. You can learn more about that here.

While searching for a merchant account provider, make sure that they are doing the appropriate underwriting and understand your business model. This will help avoid any surprises, should they come up.

2.) Setup Multiple Merchant Accounts

Fundamentally, having control over your cash flow is important in any business.  Having multiple merchant accounts with the right providers is the most important thing you can do to ensure that**.  In simplest terms, having one merchant account provider gives you a single point of failure for the most important part of your business: your money.

This is more true than ever, amidst the COVID-19 pandemic, but holds true in any economic environment.

Every single parachute has a backup chute packed. ZERO skydivers would jump without protecting their life with a backup.  Why would you ever jump into business without protecting the life of your business?

It must be noted; that there is a very good way to do this and a very, very bad way to do this.

Setting up multiple merchant accounts should never be done deceptively. It’s critical that you’re working with providers that endorse and support this. It’s highly encouraged to work with a professional to do this properly and avoid any possible negative ramifications.

You can reach out to one of our payment professionals here if you’d like guidance.

The worst thing you can do…

Is to submit a number of applications to different providers right now.
We call this the “shotgun approach”.  Every time you submit applications, not only is your credit pulled but so is what’s called a “TMF request”.  This allows Merchant Account Providers to see how many times you’ve submitted applications to other providers. If providers see that you’ve submitted to multiple places in a short period of time it significantly reduces your ability to get approved.

**It is also worth noting that if you’re selling less than $250,000 per year, your risk is significantly lower and redundancy isn’t as important.  We don’t recommend a secondary merchant account until you reach $250,000/year in sales.  Focus on sales until that point.

Remember: Do not put all your eggs in one basket!

3.) Be Proactive with Refunds 

It’s very easy for your customers and clients to click the “dispute” button next to your charge in their online banking portals. If you can make it easier for them to refund the transaction than dispute it, you’ll keep your merchant accounts intact.

This doesn’t necessarily mean you need to make refunds your first line of action.  Helping potential customers right now could make a big difference in retaining that buyer in the long run.

It’s much better to have the slightly lower cash flow for a period of time, than no cash flow at all – without a way to accept credit cards.

Merchant Account Providers don’t need a reason to hold money or close your merchant account, but they are much more likely to if you have an increasing amount of chargebacks.

A good rule of thumb is that if your chargebacks are approaching 1% of your sales, there is an increased chance of your provider holding money or closing your accounts.  You can learn more about chargeback concerns here (PDF).

To avoid this we recommend:

  1. Use your DBA name and phone number in your descriptor. That way the consumer can clearly see where the charge came from and it gives them a chance to call you before a dispute.
  2. Do not have an aggressive marketing message that is up for interpretation. If your message promises unlikely results, your consumers may feel they did not receive what they paid for, which will lead to a higher chargeback percentage.
  3. Make sure there are multiple points of contact for your business and make sure they are easy to find. If a consumer can contact you very easily for a refund, that is a chargeback avoided. This leads us to…
  4. Have an easy refund policy. That way getting a refund is easier than disputing a charge.


1.) Communicate With Your Clients 

There’s a ton of uncertainty for everyone right now.  Your customers are feeling that as much as you may be.

Communicate any possible delays, fulfillment issues, product changes or other things that may impact how your clients may be impacted by this.

2.) Sell Discounted Bundles & Services**

Your cash flow may be suffering already.  It’s time to find a win-win for all parties.

Run a promotion to discount bundled products or pre-sell services.

Many many people that have the capacity to help others – are doing so right now.  Being transparent with your audience and allowing them to stock up on your product at a discount can give you some stability and give them a lower price point for additional products or services.

You may also consider partial refunds for products already purchased but the delivery has changed. For example a delayed product or a live event that was converted to a virtual one.

**If you’re pre-selling services…

Be careful with this one.

Pre-selling services too far into the future makes Merchant Account Providers uncomfortable as it increases the time period your clients are able to dispute charges, which increases the liability for your Merchant Account Provider.  If you’re going this route, I highly recommend reaching out to one of our payment specialists to make sure you’re doing it the right way.

3.) Increase Partner/ Affiliate commissions

If you have an affiliate program or pay people to send you clients – increase that payout if you can.  It’s another easy way to get business to keep flowing right now

4.) Alter Membership / Pause Recurring Billing 

Are your members going to continue to get the exact product or service they’ve paid for?

If they aren’t, tackling that head-on is your best approach to retain your own cash flow and reduce the likelihood of chargebacks and refunds.

Obvious examples of models that are impacted; gym memberships, mastermind groups, and facilities that members can no longer physically access.  Anything you can do to fulfill your membership obligations virtually is a great first step.

It’s also important to consider temporarily freezing your membership dues, reducing them, or refunding a portion of your membership dues.

While the latter option doesn’t sound very sexy to a business that is already feeling the squeeze from the COVID-19 situation, losing your merchant account and having no way to accept payments is a worse option.

Members that aren’t getting what they pay for ask for refunds and dispute charges.  Disputes lead to merchant account providers imposing reserves and closing merchant accounts.

Refunding all or a portion of your recurring billing shows your merchant account providers that you’re proactively handling the situation – as well as your audience.

5.) Look into Providers using Ethoca and Verify

Ethoca and Verify are networks that notify merchants about disputes almost immediately. This gives the merchant a chance to refund the consumer before the dispute turns into a chargeback and increases the chargeback ratio.

What’s Your Next Step?

If your business has been processing over $250,000 a year, you need to be working with the right banking partners. Let our team of Certified Payment Specialists support you by assessing your current situation. 

Do you have the right providers? Do you have enough merchant accounts? 

We want to make sure you’re working with providers that understand your model – and that your accounts are structured properly. Just complete our 10-minute application here, or call us at: (800) 805-4949

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