5 Red Flags That Can Get Your Merchant Account Shut Down in 2022

For any entrepreneur navigating the business landscape of 2022, your merchant account is more than just a tool; it’s the heart of your commerce engine. It’s the essential bridge that allows you to accept credit and debit card payments, turning clicks into cash and browsers into buyers. But this critical component of your business is surprisingly fragile. Many business owners operate under the dangerous assumption that as long as sales are coming in, their account is safe. This could not be further from the truth.

Your payment processor and their acquiring bank are not just service providers; they are your financial partners, and they are constantly evaluating risk. Every transaction you process is underwritten by them, meaning they are on the hook for financial losses if things go wrong. Because of this, they employ sophisticated monitoring systems to look for specific red flags—behaviors and patterns that signal potential fraud, financial instability, or contractual breaches. When these flags are raised, the response can be swift and severe: a frozen account, held funds, or outright termination.

An unexpected merchant account shut down can paralyze your operations overnight, cutting off your primary revenue stream and damaging your business’s reputation. To safeguard your livelihood, you must understand what your processor is looking for. This guide will provide a deep dive into the five most critical red flags that can get your merchant account terminated this year, and more importantly, the actionable steps you can take to prevent it from happening.

Red Flag #1: Excessive Chargebacks – The Silent Business Killer

If there is one metric that keeps risk managers at payment processors up at night, it’s the chargeback rate. This is, without question, the single most common reason a merchant account gets shut down. While you may see a chargeback as a simple customer dispute, your processor sees it as a symptom of a much larger problem.

What Exactly is a Chargeback?

A chargeback is a forced reversal of funds initiated by a cardholder’s issuing bank. A customer disputes a charge on their statement, and the bank yanks the money back from you, the merchant. This process was designed to protect consumers from fraudulent charges, but in 2022, it’s often used for other reasons, including dissatisfaction with a product, a forgotten subscription, or simply not recognizing the charge.

The Dreaded Chargeback Ratio: Understanding the Numbers

Processors don’t just look at the number of chargebacks; they measure your chargeback ratio or chargeback rate. This is the percentage of your total transactions that result in a chargeback over a given month. The formula is simple:

(Total Chargebacks in a Month / Total Transactions in a Month) x 100 = Chargeback Ratio %

Card networks like Visa and Mastercard have strict programs to monitor this. The universal danger zone is a 1% chargeback ratio. If you have 1,000 transactions in one month, just 10 chargebacks put you over this threshold. Breaching this limit can result in heavy fines levied against your processor—fines they will happily avoid by simply closing your account. Most processors will take action long before you hit the 1% mark, sometimes flagging accounts that go over 0.5%.

“A high chargeback rate can be devastating for a business, leading to fines, higher processing fees, and even merchant account termination. It’s a key indicator of risk that no processor can afford to ignore.”

The Rise of “Friendly Fraud” in 2022

A significant driver of chargebacks today is “friendly fraud.” This occurs when a legitimate customer makes a purchase but disputes the charge anyway. Reasons range from buyer’s remorse to wanting to get a product for free. They may not have malicious intent; they simply find it easier to call their bank than to contact you for a return. This trend has been amplified by the ease with which banks allow disputes, making it critical for you to be proactive.

Actionable Prevention Plan for Chargebacks:

• Provide World-Class, Easily Accessible Customer Service: Make your contact information impossible to miss. A prominent phone number, a dedicated support email, and a live chat widget can divert a dispute into a conversation. The goal is to make it easier for a customer to contact you than their bank.
• Use a Crystal-Clear Billing Descriptor: The name that appears on your customer’s credit card statement (your billing descriptor) must be instantly recognizable. A charge from “WIDGETCO” is clear. A charge from “WC-2384-SALES” is confusing and a prime candidate for a dispute.
• Have Transparent and Fair Policies: Your return, refund, and cancellation policies should be easy to find and understand. Surprising a customer with a hidden “no refunds” policy is a surefire way to generate a chargeback.
• Ship Products Promptly and Communicate Delays: In an age of two-day shipping, managing delivery expectations is key. Use tracking numbers for all shipments and proactively inform customers of any potential delays to prevent “product not received” disputes.
• Employ Chargeback Prevention Tools: Services like Chargeback Alerts can notify you of a pending dispute, giving you a window to issue a refund before it officially becomes a chargeback and impacts your ratio.

Red Flag #2: Irregular Transaction Patterns and Velocity Changes

Your payment processor uses sophisticated AI and algorithms to establish a baseline of your “normal” business activity. This profile, or “processing velocity,” includes your average transaction size, total monthly volume, geographic locations of customers, and the times of day you process payments. When your activity suddenly and dramatically deviates from this established pattern, it sets off alarms.

What Processors See as Suspicious Deviations:

• Sudden Spikes in Sales Volume: If your business typically processes $30,000 per month and you suddenly hit $150,000 in a single week, your account will likely be frozen pending a review. While this could be due to a wildly successful marketing campaign, to a processor, it looks like a potential “bust-out” scheme, where fraudsters process a huge volume of stolen cards before disappearing.
• Drastic Changes in Average Ticket Size: A coffee shop that averages $10 per sale suddenly processing a $2,500 transaction is a major anomaly. This can indicate that the merchant is processing a payment for something outside their normal business model, which is a breach of contract.
• An Influx of International Orders: For a business that primarily serves a domestic market, a sudden flood of transactions from high-risk countries will trigger a security review.
• Batch Processing Irregularities: Processing a high number of transactions in a very short period, especially during odd hours, can be flagged as potential credit card testing or fraudulent activity.

The Power of Proactive Communication

This is one of the easiest red flags to manage. If you are planning a major flash sale, launching a new high-ticket item, or running a promotion that you expect will significantly increase sales, call your merchant account provider or relationship manager in advance. A simple phone call explaining your plans can get your account pre-approved for the higher volume, preventing an automated freeze and ensuring your cash flow remains uninterrupted during your most critical sales period.

Red Flag #3: Misrepresenting Your Business or Selling Prohibited Items

When you fill out your merchant account application, you are not just providing information; you are signing a legally binding contract. In that contract, you specify exactly what kind of business you operate and what you intend to sell. This information is used to assign you a Merchant Category Code (MCC) and assess your risk level. If you deviate from this, you are in direct breach of your agreement.

The High-Risk Minefield of 2022

Certain industries are inherently classified as “high-risk” due to their history of high chargeback rates, reputational concerns for the bank, or complex legal regulations. Trying to operate a high-risk business using a standard, low-risk merchant account is a guaranteed path to termination.

Industries often considered high-risk in 2022 include:

• Subscription Services and Recurring Billing
• Travel, Airlines, and Timeshares
• Nutraceuticals, CBD, and Dietary Supplements
• Online Gaming, Gambling, and Fantasy Sports
• E-cigarettes, Vape Shops, and Tobacco
• Credit Repair and Debt Collection
• Firearms and Ammunition Sales
• Adult Products and Entertainment

If your business falls into one of these categories, you must be upfront from the beginning and seek out a specialized high-risk merchant account provider. They are equipped to handle the unique challenges of your industry, though they often come with higher fees.

How to Stay Safe:

Be 100% truthful and transparent on your application. If your business model pivots—for example, you start as a one-time product seller and decide to add a subscription box—you must contact your processor to get this new model approved. Never attempt to “sneak in” unapproved products or services. Their underwriting teams will eventually find out.

Red Flag #4: Transaction Laundering – The Unforgivable Sin

Transaction laundering, also known as factoring, is one of the most severe violations in the payment processing world. It occurs when an approved merchant knowingly or unknowingly processes transactions on behalf of another, unapproved business. In short, you are letting someone else use your merchant account to accept payments.

This might seem harmless—perhaps a friend’s business has a frozen account and they ask you to process “just a few sales” for them. However, in the eyes of the card networks, this is a cardinal sin. It completely circumvents the underwriting process that is designed to vet businesses and prevent fraud. By doing this, your business is assuming all the risk for the laundered transactions, including any chargebacks or fraudulent activity.

The Consequences: Placement on the MATCH List

Getting caught laundering transactions will not just get your account terminated; it will almost certainly land your business and your name on the MATCH List (Member Alert to Control High-Risk Merchants). The MATCH List is a blacklist shared by all acquiring banks. Being placed on this list makes it nearly impossible to get another merchant account from any provider for at least five years. It is effectively a death sentence for your ability to accept credit cards.

Red Flag #5: Blatant Disregard for PCI DSS Security

The Payment Card Industry Data Security Standard (PCI DSS) is a mandatory set of security protocols for any organization that stores, processes, or transmits cardholder data. While modern payment gateways and processors handle the most sensitive aspects of this, you, the merchant, still have responsibilities.

Ignoring these responsibilities makes you a massive liability in the eyes of your processor. A data breach that originates from your business can result in catastrophic fines from the card networks, and your processor is on the front line for that financial hit. They will not hesitate to cut ties with a merchant who demonstrates poor security hygiene.

Common Ways Merchants Fail PCI Compliance:

• Failing to complete the annual PCI Self-Assessment Questionnaire (SAQ).
• Using outdated e-commerce software, plugins, or themes with known security vulnerabilities.
• Storing credit card numbers, expiration dates, or CVV codes on your own systems, even in a “secure” file.
• Using weak or default passwords for your website admin panel or payment gateway portal.

Compliance is not optional. Consistently ignoring PCI compliance requirements and validation requests is a clear signal to your processor that you are not taking security seriously, and it’s a red flag they will act on.

Frequently Asked Questions (FAQ)

Can I get my money if my account is frozen or shut down?

If your account is frozen during a review, the funds will typically be held until the review is complete. If it’s reinstated, the funds are released. If your account is terminated, the processor will often hold your funds for an extended period, typically 180 days, to cover any potential chargebacks that may arise after the closure. Getting access to this money can be a long and difficult process.

Is a PayPal, Stripe, or Square account the same as a merchant account?

Yes and no. These services are Payment Service Providers (PSPs) or aggregators. This means they use one massive merchant account and allow many sub-merchants (like you) to process payments under it. While this makes signing up incredibly fast and easy, it also means they have a very low tolerance for risk. They are known for shutting down accounts with even less warning than traditional merchant account providers because a single risky user threatens their entire platform.

How long does a MATCH List placement last?

A standard placement on the MATCH List lasts for five years. During this time, virtually all standard processors will automatically decline your application. Removing your name from the list before the five-year period is extremely difficult and typically only happens if you can prove you were placed on it in error.

Conclusion: Protecting Your Merchant Account is Protecting Your Business

In 2022, your merchant account is an indispensable asset. Losing it is not a minor inconvenience; it’s a business-threatening event. The key to prevention is shifting your mindset from being a passive user to a proactive manager of your payment processing relationship.

Stay vigilant about your chargeback rate, communicate openly with your processor about any significant changes in your business, be transparent about what you sell, maintain rigorous security standards, and never, under any circumstances, process transactions for another business. By understanding these red flags and actively working to avoid them, you can ensure your account remains healthy, your cash flow remains stable, and your business continues to thrive.