How to Write a Demand Letter When Payment Processors Freeze Your Funds: Stripe, PayPal, Square, Shopify Payments and Others
If you’re reading this article, your payment processor has probably frozen tens of thousands of dollars of your money and you’re getting nowhere with customer support. You’ve submitted tickets, uploaded documents, waited weeks for responses, and received nothing but automated replies or vague references to “risk reviews” and “policy violations.” Meanwhile, your business is hemorrhaging cash, you can’t make payroll, and vendors are threatening to stop working with you.
This situation is far more common than it should be. Payment processors like Stripe, PayPal, Square, Shopify Payments, and Authorize.Net routinely freeze merchant accounts and hold funds for ninety to one hundred eighty days with minimal explanation. While these companies have legitimate reasons to manage risk and protect themselves from chargebacks and fraud, their automated systems and risk models often flag legitimate businesses, and their appeal processes are opaque at best and nonexistent at worst.
A well-crafted demand letter can change the dynamic entirely. Instead of being another faceless support ticket in a queue handled by first-tier agents with no authority, a legal demand forces your case to be reviewed by someone with actual decision-making power. This guide will show you how to prepare and send a demand letter that maximizes your chances of getting your funds released, or at minimum, sets you up for success in arbitration or small claims court if the processor refuses to cooperate.
Understanding Why Payment Processors Can Hold Your Money
Most merchants incorrectly assume that once money from customer payments hits their Stripe or PayPal balance, it belongs to them in the same way money in a bank account does. The legal reality is quite different. Payment processors are not banks, and the funds in your processor account are not FDIC-insured deposits. Instead, they’re typically classified as unsecured claims against the payment processor.
When you signed up for your payment processor account, you agreed to terms of service that give the processor broad discretion to delay payouts, establish reserves, freeze accounts, and hold funds to cover potential chargebacks, refunds, or other liabilities. These provisions exist across all major processors, though the specific language and mechanisms vary.
Stripe’s Services Agreement includes detailed provisions about reserves and security interests that allow Stripe to withhold payouts or require merchants to maintain reserve balances when Stripe determines there’s risk of chargebacks, fraud, or other losses. The agreement also grants Stripe a security interest in the merchant’s funds and the right to offset any amounts the merchant might owe.
PayPal’s User Agreement explicitly states that funds in business accounts are unsecured claims, not deposits. PayPal can place what it calls “Holds, Limitations, and Reserves” on accounts, including rolling reserves where a percentage of each transaction is held for a period of time, or minimum reserves where a set dollar amount must always remain in the account. The agreement gives PayPal extremely broad discretion to determine when these measures are necessary.
Square operates as a payment facilitator, aggregating many small merchants under a single master merchant account. Square’s terms include provisions allowing them to delay settlements, hold reserves, or freeze accounts based on their risk assessments. The company monitors for what it calls “abnormal processing behavior” including sudden volume spikes, changes in average transaction size, or patterns that match fraud indicators.
Shopify Payments, which is powered by Stripe on the backend, has its own layer of terms of service on top of the underlying processor agreements. Shopify’s terms explicitly grant them a security interest in merchant payout accounts and authorize them to maintain reserve accounts funded by withholding payouts.
The key takeaway is that these hold provisions are contractually valid in most cases. Your demand letter is not going to succeed by claiming that all holds are illegal. Instead, you need to argue that the specific hold on your account is excessive, disproportionate to the actual risk, inconsistent with how the contract terms should be applied given your business’s facts, or implemented without following the processor’s own stated procedures.
Common Triggers for Account Freezes and Fund Holds
Understanding what typically triggers holds helps you frame your demand letter more effectively. Most frozen account situations fall into predictable patterns, and recognizing which pattern applies to your case helps you craft the right arguments.
The first common trigger is rapid growth or unusual transaction patterns. If your account processes five thousand dollars per month for six months and then suddenly processes fifty thousand dollars in a single week, automated risk systems will flag this as suspicious even if you have a completely legitimate explanation like a successful product launch or seasonal spike. Similarly, a dramatic change in average transaction size can trigger holds.
Industry classification issues create another frequent problem. Payment processors maintain lists of high-risk business categories that receive extra scrutiny or are prohibited entirely. These lists typically include adult content, gambling, cryptocurrency, dropshipping, supplements, coaching programs, ticket resales, and various digital goods and services. Sometimes merchants are classified incorrectly, or they operate in a gray area where the business model doesn’t fit neatly into standard categories.
Chargeback and dispute ratios above one percent often trigger automatic holds or rolling reserves. Even if your actual chargeback rate is below network thresholds and below rates that would cause you to lose your ability to process cards entirely, individual processors often have lower internal thresholds that trigger enhanced monitoring or fund holds.
Documentation and compliance gaps can cause holds that feel arbitrary but are actually triggered by missing know-your-customer information, expired identity documents, bank account verification failures, or mismatches between the business description in your account and what you’re actually selling. These holds are often the easiest to resolve because you can simply provide the requested information, but only if the processor actually tells you what’s missing.
Customer complaints and negative indicators sometimes trigger holds even when chargebacks haven’t materialized yet. If you have an unusual number of Better Business Bureau complaints, negative reviews mentioning the payment processor by name, or a pattern of customers contacting the processor directly to complain about your business, risk systems may flag your account based on these reputational signals.
Geographic and cross-border factors also play a role. Processing payments for customers in certain countries, having unusual IP address patterns, or operating from locations that don’t match your business registration can all trigger fraud detection systems, especially if these factors appear suddenly or weren’t disclosed during onboarding.
Gathering Evidence Before You Send Your Demand Letter
The difference between a demand letter that gets ignored and one that prompts action is almost always the quality of the supporting evidence. Before you write a single word of your demand, you need to assemble a comprehensive evidence package that proves your business is legitimate and low-risk.
Start by downloading every piece of data available in your processor dashboard. Get complete transaction histories showing all payments received, all payouts made, and all funds currently held. Download reports showing your chargeback and dispute history with outcomes for each case. Save screenshots of every dashboard notification, warning message, or status indicator related to the hold. These screenshots should be timestamped and show the full context of the message, not just cropped portions.
Create a detailed timeline document that shows when your account was opened, your monthly processing volume over time, when the hold or freeze began, what communications you received from the processor, what documents you provided in response, and what promises or deadlines the processor gave you if any. This timeline becomes the factual backbone of your demand letter.
Gather proof that your business is legitimate and that customer orders have been fulfilled. Depending on your business type, this might include shipping confirmations with tracking numbers, delivery confirmations, customer login records showing ongoing use of your service, signed contracts or agreements with customers, or communications with customers showing satisfaction with purchases. The goal is to prove that the funds in your account represent completed transactions for real products or services, not potential fraud or unfulfilled obligations.
Collect evidence of your business’s identity and legitimacy beyond what the processor already has. This might include your certificate of incorporation or business formation documents, evidence of required business licenses, professional liability insurance, proof of your business premises, photographs of physical products or service delivery, marketing materials, and any industry certifications or credentials. Even if the processor never asked for these items, having them ready strengthens your position.
Document the harm the hold is causing. Gather evidence showing specific consequences like payroll that cannot be met, vendor invoices that are past due, credit lines that have been maxed out covering operating expenses, advertising or inventory purchases that had to be cancelled, and customer contracts that may be breached if you cannot continue operating. If you’ve had to lay off employees or stop accepting new customers because of the hold, document that. The more concrete and quantified your damages are, the more pressure the processor faces.
Pull and save the current version of all applicable terms of service and user agreements. For Stripe, this means both the General Terms and the Services Terms specific to your payment processing services. For PayPal, you need the current User Agreement. For Square, get the General Terms and Payment Terms. For Shopify Payments, you need both Shopify’s payment terms and the underlying processor terms. Save these as PDFs with the date you downloaded them because these agreements get updated frequently and you want to lock in the version you’re analyzing.
Reading Your Payment Processor Agreement Like a Lawyer
Your payment processor agreement is not light reading, but you need to understand several key provisions before you can write an effective demand letter. You’re looking for the specific contractual language that governs reserves, holds, termination, and dispute resolution.
Finding the Reserve and Hold Provisions
Every major processor agreement includes provisions about when and how they can hold funds. In Stripe’s Services Terms, look for the section titled “Reserve” which describes when Stripe can require a reserve account and how it’s funded by withholding payouts. This section typically cross-references the “Security Interest” provisions that give Stripe legal rights to the funds as collateral. The agreement will explain that reserves are meant to cover chargebacks, refunds, and other potential liabilities, and that Stripe has discretion to set the reserve amount and duration based on risk factors.
PayPal’s User Agreement has a detailed section on “Holds, Limitations, and Reserves” that describes different types of restrictions PayPal can impose. Pay attention to the language about rolling reserves versus minimum reserves, the timeframes mentioned for releasing funds, and any specific procedures PayPal must follow before imposing these measures. The agreement will state that PayPal uses proprietary risk models and that business account funds are unsecured claims, but it should also describe the general categories of risk factors that trigger holds.
Square’s Payment Terms include provisions about delaying settlements and holding reserves. Look for language about Square’s right to offset amounts you owe them against amounts they owe you, and provisions granting Square a security interest in your funds and account. The agreement should describe the circumstances under which Square can impose these measures and any limitations on how they exercise this discretion.
Understanding Suspension and Termination Rights
All processor agreements include provisions allowing them to suspend services or terminate accounts. These provisions are typically quite broad, allowing termination for violations of acceptable use policies, risk concerns, legal or regulatory requirements, or even at the processor’s sole discretion. However, even very broad provisions are not unlimited. The implied covenant of good faith and fair dealing that exists in every contract means the processor cannot exercise these rights arbitrarily or in bad faith.
When you read these provisions, note whether they require any form of notice before suspension or termination, whether they give you any opportunity to cure problems, and what they say about handling funds after termination. Many agreements specify that after termination, the processor will hold funds for ninety to one hundred eighty days to cover potential chargebacks, and then return remaining funds. If your processor is holding funds longer than their own stated timeframe or without explanation, that’s a strong point for your demand letter.
Locating the Dispute Resolution Clauses
This is critical because it tells you what your options are if the demand letter doesn’t work. Most payment processor agreements require binding arbitration for disputes, with specific rules about which arbitration organization handles cases, where the arbitration takes place, and how costs are allocated.
Stripe’s General Terms include an “Agreement to Arbitrate” section that requires disputes to be resolved through binding arbitration. The specific arbitration rules and location are set forth in the Regional Terms section of the agreement. Notably, many arbitration clauses include a small claims court carve-out, meaning you can still file in small claims court if your claim amount is below the jurisdictional limit.
PayPal’s User Agreement contains a detailed “Agreement to Arbitrate” section specifying AAA arbitration rules, location requirements, and a class action waiver. The agreement typically includes an opt-out provision that allows you to reject arbitration within thirty days of accepting the terms, though most merchants never exercise this option.
Square uses the National Arbitration and Mediation (NAM) rules rather than AAA, and specifies California law as governing. The arbitration provision includes a class action waiver and requires individual arbitration.
Understanding these arbitration provisions is essential because your demand letter needs to acknowledge them while preserving your right to use them. You want to show the processor that you understand the dispute resolution process and are prepared to follow it if necessary.
Legal Theories That Give Your Demand Letter Teeth
A demand letter without legal substance is just complaining. To be taken seriously by the processor’s legal or risk department, you need to articulate specific legal theories that explain why the hold is improper and what remedies you’re entitled to pursue.
Breach of Contract and Implied Covenant
The most straightforward theory is breach of contract. Even though the processor agreement gives them discretion to hold funds, that discretion is not unlimited. If the agreement says reserves are held to cover chargebacks and your chargeback rate is demonstrably low, holding one hundred percent of your funds for six months may exceed the legitimate scope of the reserve provision. If the agreement specifies a ninety or one hundred eighty day hold period after termination and they’re holding funds longer, that’s a clear breach.
Related to breach of contract is violation of the implied covenant of good faith and fair dealing. This covenant exists in every contract under California law and most other states. It prevents parties from exercising discretionary contract provisions in ways that are arbitrary, unreasonable, or designed to deprive the other party of the contract’s benefits. A processor that refuses to explain what risk factors triggered a hold, ignores evidence that contradicts their risk assessment, or applies their reserve policy in a way that’s grossly disproportionate to your actual risk profile may be violating this covenant.
California Unfair Competition Law
California’s Unfair Competition Law prohibits unlawful, unfair, or fraudulent business practices. The UCL is extremely broad and can incorporate violations of other laws or simply capture practices that are unfair even if they don’t violate a specific statute. A payment processor’s practice of freezing accounts with minimal explanation, holding funds far longer than necessary to cover legitimate risks, or implementing policies that systematically harm small merchants could potentially violate the UCL’s unfairness prong.
The UCL is particularly powerful because it allows for injunctive relief and restitution, and it doesn’t require you to prove all the elements of a traditional fraud or breach of contract claim. If your demand letter is directed to a California processor or if your agreement specifies California law, the UCL should be mentioned as a potential basis for a claim.
Federal UDAAP Provisions
The Consumer Financial Protection Bureau has authority under the Dodd-Frank Act to prohibit unfair, deceptive, or abusive acts or practices in connection with consumer financial products and services. While UDAAP primarily protects consumers, the CFPB has shown interest in how payment processors treat small business merchants, particularly where those merchants are essentially operating as individuals or micro-businesses.
A practice is “unfair” under UDAAP if it causes or is likely to cause substantial injury to consumers that is not reasonably avoidable and is not outweighed by countervailing benefits. A practice is “deceptive” if it misleads or is likely to mislead consumers acting reasonably under the circumstances and the misleading representation is material. A practice is “abusive” if it materially interferes with consumers’ ability to understand terms or takes unreasonable advantage of consumers’ lack of understanding or inability to protect their interests.
While you may not be able to bring a private UDAAP claim, referencing the CFPB’s UDAAP authority in your demand letter signals that you understand the regulatory framework governing payment processors and that you’re prepared to file regulatory complaints if necessary.
Electronic Fund Transfer Act and Regulation E
The Electronic Fund Transfer Act and its implementing regulation, Regulation E, primarily protect consumers in electronic fund transfers. These laws require financial institutions to investigate error claims within specific timeframes, provide provisional credits in many cases, and resolve disputes according to strict procedures. While most merchant account holds don’t fall cleanly within Regulation E’s scope because merchants aren’t consumers and payment processing isn’t a simple electronic fund transfer, there are edge cases where Regulation E principles may apply.
If you’re a sole proprietor using an account for both business and personal purposes, if the processor is holding your personal funds rather than just business revenue, or if the issue involves the processor wrongly debiting your connected bank account, you may be able to argue that Regulation E’s error resolution procedures should apply. Even where Regulation E doesn’t technically apply, citing its procedures as a baseline standard for how quickly and fairly processors should resolve disputes can strengthen your position.
Conversion and Unjust Enrichment
If a processor holds your funds for an unreasonably long period without legitimate justification, particularly after any reasonable chargeback window has closed, you may have claims for conversion or unjust enrichment. Conversion is the wrongful exercise of control over another’s property in a manner inconsistent with their ownership rights. Unjust enrichment occurs when one party receives a benefit that it would be unjust for them to retain.
These theories become particularly relevant when processors hold funds for six months or longer with no clear explanation, when they claim the right to keep funds as “liquidated damages” or penalties that aren’t specified in the contract, or when they simply ignore requests for fund release after the stated hold period expires.
Structuring Your Demand Letter for Maximum Impact
A demand letter to a payment processor needs to accomplish several things simultaneously. It must establish your credibility as a serious, legally sophisticated party. It must present the facts in a way that makes it obvious you’re a legitimate business caught by overzealous risk systems rather than a fraudster. It must identify specific contractual and legal problems with the current hold. It must make concrete, reasonable demands for resolution. And it must create consequences for inaction without sounding like empty threats.
Opening and Introduction
Start with a clear statement of who you are, who you represent if you’re an attorney, what account is at issue, and what the problem is. For example: “I represent John Smith, operating as Smith Digital Services, in connection with Stripe account number ending in 4567. This letter concerns Stripe’s continuing hold on forty-three thousand dollars in funds earned from legitimate business transactions, which began on October 15, 2024, and continues without adequate explanation or justification.”
If you’re writing as the merchant rather than as an attorney, you can still use formal language: “I am writing regarding my PayPal business account ending in 8901. PayPal has held sixty-two thousand dollars of my business funds since September 3, 2024, despite my repeated provision of requested documentation and my demonstrated low-risk business profile.”
Factual Background
Present your account history chronologically and factually. Describe when the account was opened, what your business does in neutral language, what your typical transaction volume and patterns have been, when problems began, and what communications have occurred since. Use specific dates and dollar amounts throughout.
For example: “My business provides online coaching services for real estate professionals. I opened my Square account in January 2023 and processed between eight thousand and twelve thousand dollars monthly through August 2024. In September 2024, I launched a new group coaching program that resulted in twenty-eight transactions totaling forty-five thousand dollars in a single week. On September 22, 2024, Square placed a hold on all funds and sent an automated email stating my account was under review. I immediately responded with the requested business documentation including proof of program delivery, customer testimonials, and refund policy. Since then, I have received only automated responses stating the review is ongoing.”
This kind of factual recitation does several things. It shows you’re an established merchant, not someone who just opened an account to commit fraud. It provides a legitimate explanation for any unusual activity that triggered the hold. It demonstrates that you’ve cooperated with requests for information. And it establishes that the processor has failed to follow up despite your cooperation.
Contractual Analysis
This is where you show that you’ve actually read the agreement and understand what it does and doesn’t allow. Quote or paraphrase the relevant provisions and then explain why the current hold exceeds or violates those provisions.
For example: “Section 3.3 of Stripe’s Services Terms authorizes Stripe to require a reserve ‘if Stripe determines, in its sole discretion, that there is a financial risk associated with your Stripe Account.’ However, Stripe’s discretion is not unlimited and must be exercised in good faith and consistent with the stated purpose of the reserve provision, which is to cover potential chargebacks, refunds, and other payment obligations. The current hold on one hundred percent of my account balance, with no explanation of what specific chargebacks or liabilities justify this hold, is not a good faith exercise of contractual discretion.”
Or for PayPal: “PayPal’s User Agreement describes reserves as tools to manage risk from chargebacks and disputes. My account has processed over two hundred thousand dollars in total volume with only three chargebacks, representing 1.5 percent of transaction volume, all of which were resolved in my favor. The current unlimited hold on all funds is grossly disproportionate to this demonstrated low-risk profile.”
Legal Framework Section
After addressing the contractual issues, briefly outline the legal theories that support your position. You don’t need to write a legal brief, but you should cite specific statutes or legal principles with enough detail to show you know what you’re talking about.
For example: “PayPal’s indefinite hold on funds with minimal explanation potentially violates California’s Unfair Competition Law, Business and Professions Code Section 17200 et seq., which prohibits unfair, unlawful, and fraudulent business practices. The practice of holding merchant funds far beyond the timeframe necessary to cover legitimate liabilities, without clear explanation or path to resolution, constitutes an unfair business practice that causes substantial harm to merchants without corresponding consumer or business justification.”
Or: “The Consumer Financial Protection Bureau has authority under 12 U.S.C. Section 5531 to prohibit unfair, deceptive, or abusive acts or practices by providers of consumer financial products and services. Recent CFPB guidance has emphasized the importance of transparency, reasonable account access, and fair treatment of payment app users. Square’s practice of freezing accounts without clear explanation or timely review may raise UDAAP concerns.”
Harm and Damages
Be specific about the consequences of the hold. Generic statements like “this is hurting my business” carry no weight. Instead, provide concrete examples with numbers.
For example: “The hold on funds has caused the following specific harm: I have been unable to pay August contractor invoices totaling seventeen thousand dollars, resulting in three contractors terminating their relationships with my business. I have missed a critical advertising commitment for the holiday season that would have cost twelve thousand dollars but was projected to generate seventy-five thousand dollars in revenue based on prior year performance. I have been forced to suspend new client onboarding, turning away approximately twenty-five prospective customers representing an estimated forty thousand dollars in lost revenue. If the hold continues past November 30, I will be unable to make December payroll for my two employees.”
Quantified, specific harm puts the processor in a difficult position. They now know exactly what damages you could claim in arbitration or litigation if you prevail, which helps them evaluate the risk of not settling.
Specific Demands
Make clear, concrete demands that give the processor multiple ways to resolve the situation. Don’t just demand “release all my funds immediately” because that may be a non-starter even if your case is strong. Instead, propose a reasonable resolution path.
For example: “I request that Stripe take the following actions within ten business days: First, provide a written explanation of the specific risk factors that triggered the account review and current hold. Second, release all funds not reasonably necessary to cover existing or clearly anticipated chargebacks and refunds. Based on my transaction history and current dispute rate, a reserve of five thousand dollars would more than adequately cover any reasonable liability exposure. Third, if Stripe believes additional information is needed to complete its review, provide a specific list of required documentation and a timeline for review after that documentation is provided.”
Offering a reasonable middle ground like a partial release or a finite reserve rather than insisting on all-or-nothing shows you’re acting in good faith and makes it harder for the processor to dismiss your letter as unreasonable.
Dispute Resolution and Escalation Language
Acknowledge the arbitration clause or other dispute resolution provisions and make clear you’re prepared to use them. Reference any pre-arbitration notice requirements in the agreement.
For example: “If we cannot resolve this matter informally, I am prepared to pursue binding arbitration as required by Section 11 of Stripe’s General Terms. This letter constitutes formal notice of a dispute as required by Section 11.4 and includes my account information, a description of the nature and basis of the claim, and the relief sought. I would prefer to resolve this matter without the time and expense of arbitration, but I will file a demand for arbitration with the designated arbitration provider if I do not receive a substantive response by the deadline stated above.”
Also indicate that you may file regulatory complaints if the matter remains unresolved: “I am also prepared to file complaints with the Consumer Financial Protection Bureau, the California Department of Financial Protection and Innovation, and other relevant regulatory authorities if necessary. I would prefer not to take these steps if a reasonable resolution can be reached directly.”
Professional Closing
End with a professional closing that preserves your rights: “I hope we can resolve this matter promptly and restore a productive business relationship. However, if I do not receive a satisfactory response by [specific date], I will proceed with the steps outlined above. Nothing in this letter should be construed as a waiver of any rights, claims, or defenses, all of which are expressly reserved.”
Processor-Specific Considerations
While the general structure of demand letters is consistent across processors, each major platform has quirks and patterns that should inform how you approach your letter.
Stripe
Stripe is heavily process-driven and typically responsive to well-documented cases. Your demand letter should emphasize that you’ve completed all dashboard action items and document requests. If Stripe gave you a list of required documents, create an exhibit showing each requested item and when you provided it. Stripe’s risk teams often rely on automated signals, so your letter should provide clear evidence that contradicts those signals. If your account was flagged for “unusual activity,” explain exactly what changed and why it’s legitimate. If you were flagged for a high-risk business type, show evidence that your actual business model fits within Stripe’s acceptable use policy.
Because Stripe has a sophisticated legal and compliance infrastructure, letters that cite specific Services Agreement provisions and demonstrate understanding of risk management concepts tend to be escalated to appropriate decision-makers. Reference Stripe’s reserve provisions by section number and explain why a total hold is disproportionate to your risk metrics.
PayPal
PayPal has a long history of merchant complaints about frozen funds and long hold periods. The company’s user agreement explicitly classifies business account funds as unsecured claims, which gives PayPal significant legal protection. Your demand letter needs to work within this framework rather than pretending it doesn’t exist.
Focus on the disproportionality argument. PayPal’s own terms describe reserves as risk-management tools, not punishment or profit centers. If you have low chargeback rates, high customer satisfaction metrics, and clear delivery documentation, emphasize these points. Request that PayPal specify which type of reserve they’ve imposed (rolling versus minimum), what metrics triggered it, and what specific conditions would lead to a reduction or removal.
PayPal’s arbitration clause uses AAA rules and includes provisions about fee allocation that can work in your favor for smaller disputes. Make sure your demand letter functions as proper pre-arbitration notice by including all required elements.
Square
Square is known for abrupt account freezes, often with minimal explanation. The company’s risk models appear to be particularly sensitive to sudden volume changes and business category issues. Your demand letter should address these specific concerns.
If Square cited “abnormal processing behavior,” provide a detailed explanation with supporting evidence. For example, if you normally process five thousand dollars per month and suddenly processed thirty thousand in one week due to a legitimate seasonal event or promotion, attach evidence of the promotion, customer communications, and fulfillment records showing these were genuine sales to real customers.
Square’s arbitration clause uses NAM rather than AAA and specifies California law. NAM has different fee structures and procedures than AAA, so if you proceed to arbitration, you’ll need to familiarize yourself with NAM’s specific rules.
Shopify Payments
Shopify Payments is actually powered by Stripe infrastructure, but with an additional layer of Shopify’s own policies and terms. This creates a complex situation where you may need to address your demand to Shopify while also understanding the underlying Stripe terms.
Shopify appears to be particularly sensitive to certain business categories and to complaints from customers. If your hold was triggered by customer complaints, address those complaints directly in your demand letter. Provide evidence that you’ve resolved the underlying issues, implemented better customer service practices, or clarified your refund and return policies.
The most common complaint about Shopify Payments involves being deemed “unsupportable by our banking partners” with little explanation. If this happened to you, your demand letter should ask Shopify to identify specifically which banking partner requirements you allegedly failed to meet and what steps you can take to become supportable.
Escalation Strategies Beyond the Demand Letter
A demand letter alone may not be sufficient, particularly with processors that have been unresponsive for weeks or months. Strategic escalation through multiple channels simultaneously often produces better results than waiting for a response to your letter.
Regulatory Complaints
Filing complaints with regulatory agencies serves multiple purposes. It creates a paper trail, it adds pressure on the processor to resolve your issue to keep their complaint metrics favorable, and in some cases it triggers actual investigation and intervention.
The Consumer Financial Protection Bureau accepts complaints about payment processors and has been increasingly active in supervising and examining nonbank payment companies. File a detailed CFPB complaint through their online portal describing the hold, the dollar amount, how long it’s been frozen, what attempts you’ve made to resolve it, and what specific harm you’ve suffered. The CFPB requires companies to respond to complaints within fifteen days, and all complaints become part of the CFPB’s public database.
For California-based merchants or complaints against California-based processors, the California Department of Financial Protection and Innovation regulates money transmitters and can be an effective pressure point. DFPI takes complaints through their online portal and has enforcement authority over licensed entities.
State attorneys general consumer protection divisions also accept complaints about payment processors. While they rarely intervene in individual cases, patterns of complaints can trigger investigations. Your complaint may be the one that tips a file into investigation status.
Better Business Bureau
While the BBB is not a government agency and has no regulatory power, payment processors care deeply about their BBB ratings and complaint records. BBB complaints often get escalated to higher-tier customer relations teams that have more authority to make decisions than standard support channels.
When filing a BBB complaint, be factual and unemotional. State the dates, amounts, and specific promises the processor made that they didn’t keep. Attach key documents as exhibits. The BBB will forward your complaint to the company and give them an opportunity to respond, and this response often comes from a different part of the organization than standard support tickets.
Small Claims Court
If your claim amount is within your state’s small claims jurisdiction, filing in small claims court can be remarkably effective even if you don’t ultimately go to trial. Most processor arbitration clauses include small claims court carve-outs, meaning you preserve your right to file in small claims despite the arbitration clause.
Small claims court is designed for non-lawyers, filing fees are modest, and cases move relatively quickly. The mere fact that you’ve filed a lawsuit forces the processor to spend more money defending than settling would cost. Many processors settle small claims cases rather than sending lawyers to appear.
When you file, attach your demand letter and the processor’s inadequate response as exhibits. This shows the court you made good faith efforts to resolve the matter before filing.
Arbitration
If your claim exceeds small claims limits or if you prefer the arbitration forum, initiating arbitration demonstrates you’re serious about pursuing your claim. Most processor arbitration clauses require you to send a pre-arbitration notice, which your demand letter should satisfy if properly drafted.
Review the arbitration clause carefully to determine which organization handles the arbitration, whether it’s AAA, NAM, CPR, or another provider. Different providers have different filing fees, procedures, and consumer-friendly provisions. Some agreements require the processor to pay certain fees for small claims, which shifts the economics in your favor.
Arbitration can be expensive and time-consuming, but the threat of arbitration often produces settlements. Processors know that the cost of having their lawyers prepare for and attend arbitration typically exceeds the amount at issue in most merchant disputes.
Sample Demand Letter Template
Below is a template you can adapt for your specific situation. Replace bracketed placeholders with your actual information and modify the legal sections to match your processor and jurisdiction.
[Your Name]
[Your Business Name]
[Street Address]
[City, State ZIP]
[Email]
[Phone]
[Date]
VIA EMAIL AND CERTIFIED MAIL
[Payment Processor Name]
Attn: Legal Department / Risk Department
[Processor Address]
[City, State ZIP]
Re: Demand for Release of Funds and Account Review
Account Number: [Last Four Digits]
Account Holder: [Your Business Name]
Dear Sir or Madam:
I am writing regarding [Payment Processor]’s continuing hold on funds in my business account referenced above. Despite repeated good faith efforts to resolve this matter through your standard support channels, [Payment Processor] continues to hold [$XX,XXX] in funds earned from legitimate business transactions, causing substantial and continuing harm to my business.
Account Background and History
I opened my [Payment Processor] account on [date] for the purpose of processing payments for [brief neutral description of business]. From [month/year] through [month/year], I processed an average of [$X,XXX] per month through the account, with an average transaction size of [$XXX]. During this period, I maintained a chargeback rate of [X%], well below industry standards and payment network thresholds.
[If applicable: In [month/year], my processing volume increased to [$XX,XXX] due to [specific legitimate business reason, such as product launch, seasonal promotion, new marketing campaign]. This increase was entirely consistent with my business model and represented sales to legitimate customers for delivered goods/services.]
The Hold and Inadequate Response
On [date], I received notice that [Payment Processor] had placed a hold on my account and would not process payouts pending an account review. [If applicable: The notice stated that the hold was due to [quote any reason given].] I immediately responded by providing [list documents provided, such as: business formation documents, proof of product delivery, customer communications, bank statements, identity verification, and any other requested documentation].
Despite providing all requested information, [Payment Processor] has continued to hold [$XX,XXX] for [number] days/months with no clear explanation of what additional information is needed, what specific risk factors justify the hold, or when I can expect a resolution. I have received only automated responses to my support requests stating that my case is “under review” or “with the appropriate team.”
Contractual Framework
I understand that [Payment Processor]’s [Services Agreement / User Agreement] grants [Payment Processor] discretion to establish reserves and delay payouts to manage risk. However, this discretion must be exercised in good faith and in a manner reasonably related to legitimate risk management purposes.
[For Stripe: Section 3.3 of Stripe’s Services Terms authorizes reserves “if Stripe determines, in its sole discretion, that there is a financial risk associated with your Stripe Account.” However, any hold must be proportionate to actual risk. My account’s demonstrated low chargeback rate, established processing history, and clear documentation of fulfilled transactions do not support a complete freeze of all funds.]
[For PayPal: PayPal’s User Agreement describes reserves and holds as tools to manage potential chargebacks and disputes. With only [X] chargebacks out of [XXX] total transactions, representing [X%] of volume, and with clear evidence of product/service delivery, the current hold is grossly disproportionate to any legitimate risk.]
[For Square: Square’s Payment Terms allow reserves and delayed settlements to cover potential losses. However, the current [X]-day hold on [$XX,XXX] is not justified by my actual risk profile given [state specific low-risk factors].]
Risk Profile and Low-Risk Factors
The current hold is not supported by my account’s actual risk metrics:
Chargeback Rate: [X%] over [time period], well below the [1%] threshold typically considered high-risk
Dispute Resolution: [X] disputes, of which [X] were resolved in my favor
Business Age: [X] months/years of established operation
Customer Satisfaction: [Describe evidence such as positive reviews, low complaint rate, etc.]
Transaction Legitimacy: [Describe proof of delivery, service completion, etc.]
Harm from Continued Hold
The hold on funds has caused and continues to cause specific, quantifiable harm to my business:
- I have been unable to [specific example with dollar amount, such as: pay October payroll totaling $X,XXX for my X employees]
- I have [specific example such as: defaulted on vendor invoices totaling $X,XXX, damaging critical business relationships]
- I have been forced to [specific example such as: cancel planned advertising spending of $X,XXX, which would have generated an estimated $X,XXX in revenue]
- I have [specific example such as: turned away X new customers representing approximately $X,XXX in lost revenue]
If the hold continues beyond [date], I will [specific additional harm such as: be unable to make rent payment on business premises, be forced to terminate employees, face breach of contract claims from customers with prepaid services].
Legal Framework
[Payment Processor]’s handling of this matter raises several legal concerns:
The current hold may constitute a breach of the implied covenant of good faith and fair dealing that exists in every contract under [state] law. [Payment Processor]’s failure to explain what risk factors justify the hold, refusal to consider clear evidence of low risk, and maintenance of a hold far beyond what is necessary to cover potential liabilities suggests arbitrary exercise of contractual discretion inconsistent with good faith.
[If applicable: California’s Unfair Competition Law, Business and Professions Code Section 17200 et seq., prohibits unfair business practices. Maintaining disproportionate holds on merchant funds, particularly where the merchant has cooperated fully and demonstrated low risk, may constitute an unfair practice causing substantial harm without countervailing business justification.]
[If applicable: The Consumer Financial Protection Bureau has authority under 12 U.S.C. Section 5531 to prohibit unfair, deceptive, or abusive acts or practices. [Payment Processor]’s practices regarding merchant account holds may raise UDAAP concerns, particularly where holds are maintained without clear explanation or reasonable review procedures.]
Requested Relief
I request that [Payment Processor] take the following actions within ten (10) business days of receipt of this letter:
First: Provide a written explanation of the specific risk factors that triggered and continue to justify the current hold, including any specific transactions, customer complaints, or policy violations that [Payment Processor] believes warrant restricted account access.
Second: Release immediately all funds that are not reasonably necessary to cover existing or clearly anticipated chargebacks, refunds, or other liabilities. Based on my transaction history and demonstrated low-risk profile, a reserve of [$X,XXX] would adequately cover any reasonable contingency. Holding the entire [$XX,XXX] balance serves no legitimate business purpose and causes disproportionate harm.
Third: If [Payment Processor] requires additional information to complete its review, provide a specific list of required documentation and a concrete timeline for completing the review after that documentation is provided.
Fourth: Confirm in writing either that my account will be restored to normal operating status or, if [Payment Processor] determines the account cannot be restored, provide a clear schedule for releasing funds consistent with [Payment Processor]’s stated policies and applicable law.
Dispute Resolution
I note that [Payment Processor]’s [Services Agreement / User Agreement] requires binding arbitration of disputes [and/or preserves the right to proceed in small claims court for claims below the jurisdictional limit]. This letter constitutes formal notice of a dispute as required by [cite specific section] of the Agreement. It includes my account information, a description of the facts and legal basis for my claim, and the specific relief I am seeking.
I prefer to resolve this matter without the time and expense of formal proceedings. However, if I do not receive a substantive response addressing the points raised in this letter by [specific date], I will proceed with [arbitration / small claims filing / both] as appropriate.
I am also prepared to file complaints with the Consumer Financial Protection Bureau, the [California Department of Financial Protection and Innovation / relevant state regulator], the [state] Attorney General’s Consumer Protection Division, and other applicable regulatory authorities if this matter cannot be resolved through direct communication.
Preservation of Rights
Nothing in this letter should be construed as a waiver of any rights, claims, defenses, or remedies available to me under the [Services Agreement / User Agreement], applicable law, or equity. All such rights are expressly reserved.
I hope we can resolve this matter promptly and constructively. Please direct your response to my email address at [your email] or by mail to the address above.
Sincerely,
[Your Signature]
[Your Typed Name]
[Your Title if Business Owner]
Enclosures:
[List any key attachments, such as:
- Timeline of communications with [Payment Processor]
- Proof of business legitimacy and incorporation
- Transaction and chargeback history
- Evidence of product/service delivery
- Documentation of specific harm]
Frequently Asked Questions
What if the payment processor agreement clearly states they can hold funds for ninety or one hundred eighty days after account termination?
Many agreements do include these provisions, and they’re generally enforceable as a contractual matter. However, even where the contract allows extended holds, the processor must still exercise that right reasonably and in good faith. Your demand letter should acknowledge the provision but argue that the circumstances don’t justify invoking it. For example, if your account has extremely low chargeback rates, all orders have been delivered, and you’ve been cooperative throughout, holding funds for the maximum period may be unreasonable even if technically allowed. Additionally, some processors invoke these long hold periods for accounts they simply want to offboard even though the account was never actually terminated for cause, and this practice may be challengeable.
How long does it typically take to get a response to a demand letter?
Response times vary dramatically by processor and situation. Well-documented demand letters sent to the correct legal or risk department often generate responses within one to three weeks. However, some processors simply don’t respond to demand letters, particularly if they’re sent to general support addresses rather than legal contacts. If you don’t get a response within your stated deadline, immediately proceed with your threatened escalation steps such as filing arbitration or regulatory complaints. Empty deadlines that you don’t enforce destroy your credibility.
Should I hire a lawyer to write the demand letter or can I do it myself?
For straightforward cases with strong facts and clear documentation, merchants often succeed with self-written demand letters using the template and guidance in this article. The cost of hiring an attorney to write a demand letter typically ranges from several hundred to over a thousand dollars, which may not be economical for smaller disputed amounts. However, if your frozen funds exceed twenty thousand dollars, if the fact pattern is complex, or if the processor has been particularly unresponsive or aggressive, having an attorney write the letter can be worth the investment. Attorney letterhead signals seriousness and often gets escalated faster than letters from merchants.
What happens if I send the demand letter and the processor terminates my account entirely?
This is a legitimate concern, though in practice it’s relatively rare for a processor to terminate an account solely because you sent a demand letter. If your account is already frozen and under review, sending a demand letter typically doesn’t change your status for the worse. The processor has already made their risk decision. That said, your tone in the letter matters. Professional, fact-based letters that acknowledge the processor’s legitimate interests while explaining why the current hold is disproportionate are less likely to trigger defensive reactions than aggressive letters that make wild legal claims.
Can I withdraw my funds before sending a demand letter?
If your account is already frozen, you obviously cannot withdraw funds. But if you’re concerned that raising issues might trigger a freeze, you have to weigh the risks. If you have legitimate concerns that your account might be flagged for example if you’re in a business category that’s borderline acceptable or if you’ve had some recent unusual transactions, you might prefer to gradually draw down your balance before addressing problems. However, this approach only works if you haven’t already been flagged. Most freezes happen suddenly without warning.
What if the payment processor claims they found evidence of fraud or policy violations?
If the processor makes specific factual allegations, address them directly and provide contrary evidence. For example, if they claim high chargeback rates, provide your actual data showing low rates. If they claim you’re in a prohibited business category, show evidence that your actual business fits within allowed categories. If they claim you violated terms by not delivering products, provide shipping confirmations and delivery proof. Never ignore specific allegations, even if they seem ridiculous. A demand letter that doesn’t address the processor’s stated concerns will be dismissed.
Should I threaten to file complaints with regulatory agencies in my demand letter?
Yes, but frame it carefully. Don’t say “I’m going to destroy you with regulatory complaints.” Instead, use language like “If we cannot resolve this matter cooperatively, I will need to explore all available remedies, which may include complaints to the CFPB, state financial regulators, and relevant attorneys general.” This signals that you know what agencies have jurisdiction and that you’re prepared to use them, without sounding threatening or unprofessional. Some lawyers prefer to file the complaints simultaneously with sending the demand letter rather than threatening them, which can accelerate response times.
What if my business actually is in a high-risk category?
Being in a high-risk industry doesn’t mean you have no rights or that demand letters are futile. It does mean your letter needs to be more realistic about what you’re asking for. Instead of demanding immediate release of all funds, focus on asking for a reasonable, defined reserve that’s proportionate to your actual metrics. Show that you understand the risk factors inherent in your industry and explain how your specific business mitigates those risks through practices like clear refund policies, excellent customer service, quality products, or strong delivery confirmation procedures.
Can I sue the payment processor for damages beyond just getting my funds back?
Potentially yes, though the processor agreements typically limit your remedies and waive consequential damages. However, if you can show that the processor’s actions were in bad faith, violated specific legal obligations, or constituted conversion of your property, you might be able to recover damages for lost business opportunities, harm to credit rating, or other consequential losses. These claims are harder to prove and usually require attorney representation. Your demand letter should preserve these claims by describing the specific harm you’ve suffered in addition to requesting release of funds.
What if the processor offers a partial release but won’t release everything?
A partial release offer is a negotiation starting point. Evaluate whether the offered amount is reasonable given the actual risk factors in your case. If they offer to release seventy percent and hold thirty percent for ninety days to cover potential chargebacks, that might be a reasonable compromise if your chargeback rate has been slightly elevated. On the other hand, if they offer to release twenty percent and hold eighty percent with no clear justification, you may want to reject the offer and proceed with arbitration. Consider the economics carefully—taking fifty percent immediately may be better than spending six months and thousands in legal fees fighting for one hundred percent.
How do I prove that my business is legitimate when the processor won’t tell me what their concerns are?
This is frustrating but common. Your demand letter should proactively address all the typical red flags processors look for, even if they haven’t stated specific concerns. Address business model legitimacy, delivery of products or services, customer satisfaction, chargeback history, identity verification, business licensing, and anything else that might raise questions. Include exhibits showing incorporation documents, business licenses, proof of delivery, customer testimonials, and financial records. The goal is to make it obvious that you’re a real business, not a fraudster, regardless of what specific concern triggered their systems.
What if I’ve been sending support tickets for weeks and getting nowhere?
Standard support channels are often useless for serious hold issues because frontline support agents have no authority to make decisions about accounts under risk review. Those cases are handled by specialized risk and compliance teams that often don’t respond to standard tickets. This is exactly why demand letters matter—they create a formal escalation path to people with actual decision-making authority. Your demand letter should reference your support ticket history to show good faith efforts at resolution, but don’t expect the letter itself to go through support channels. Send it to legal or risk department emails or addresses.
Can I post about the frozen funds on social media or review sites?
You have First Amendment rights to share truthful information about your experience, but be very careful about how you frame it. Stick to facts you can prove: “My account has been frozen for ninety days despite my providing all requested documentation and maintaining a point-two percent chargeback rate” is defensible. “Company X is stealing from merchants” or “Company X is running a scam” are opinions that could get you sued for defamation if you can’t prove them. Many processor agreements include non-disparagement clauses, though these are often unenforceable. Some merchants have gotten faster resolutions by posting factual accounts on Twitter or other platforms where the company has active social media teams, but this strategy can also backfire if the company becomes defensive.
What if the frozen funds include money that I need to refund to customers?
This creates a particularly difficult situation. Your demand letter should emphasize this point strongly—by holding your funds, the processor is preventing you from fulfilling refund obligations, which harms consumers and creates additional chargeback risk. Some processors will release funds specifically for processing refunds even while holding the remainder. Ask for this explicitly in your demand. If you can provide a list of specific pending refunds with customer names and amounts, include it as an exhibit.
Should I accept a settlement that requires me to sign a release and non-disparagement agreement?
This depends on your specific situation and how much you’re recovering. Processors often offer settlements conditional on signing broad releases that waive all claims and agreeing not to disparage the company publicly. If you’re recovering a substantial portion of your funds and you’re ready to move on, these agreements are often worth signing. However, read them carefully—some contain overly broad clauses that could prevent you from even answering questions honestly if someone asks about your experience. You can sometimes negotiate narrower language that prevents you from making false statements but preserves your right to share truthful information.
What if multiple merchants are experiencing the same issue with the same processor?
Payment processor arbitration clauses typically include class action waivers, making class action lawsuits difficult or impossible. However, you can still coordinate with other affected merchants in informal ways. Sharing information about successful strategies, pooling resources to hire an attorney to write template demand letters, or filing coordinated regulatory complaints can all be effective. Some attorneys do take on groups of merchants with similar issues even without formal class action structure. Just be aware that your arbitration clause likely prevents you from participating in class proceedings.
How long after my account is frozen should I wait before sending a demand letter?
Don’t wait too long. If you’ve submitted the requested documentation and given the processor two to three weeks to respond without receiving any substantive communication, it’s time for a demand letter. Waiting months before escalating weakens your position and may push your claim outside of any contractual notice periods or applicable statutes of limitations. The demand letter itself can give the processor an additional reasonable period like ten to fourteen days to respond, but you should send the letter relatively early in the dispute timeline.
What if the processor responds to my demand letter but their response doesn’t actually address my concerns?
A response that simply restates their position without addressing your specific arguments or evidence is a delay tactic. Send a brief follow-up letter noting that their response failed to address the specific points raised in your demand, reiterating your key arguments, and stating that if you don’t receive a substantive response within a very short additional period such as five business days, you’ll proceed with arbitration or other remedies. Then follow through. Don’t let yourself get drawn into endless rounds of letters that go nowhere.
Can payment processors legally keep my funds as a penalty or punishment?
Generally no. The contractual provisions that allow holds are meant to cover potential liabilities like chargebacks and refunds, not to punish merchants or generate profit for the processor. If a processor claims the right to keep your funds as “liquidated damages” or some other penalty not clearly specified in your agreement, that’s likely unenforceable and potentially grounds for conversion or unjust enrichment claims. Your demand letter should directly challenge any assertion that the processor has the right to confiscate funds beyond covering actual documented liabilities.
What if I signed the processor agreement without reading it—can I still challenge the hold?
Yes. The fact that you didn’t read the agreement doesn’t mean you have no rights. The agreement is still subject to principles of contract law including the implied covenant of good faith and fair dealing, rules against unconscionability, and limits on one-sided contract terms. Your demand letter should work within the contractual framework where possible, but you can also argue that specific provisions are unenforceable or that the processor is applying the agreement in ways that exceed what a reasonable person would have understood they were agreeing to.
Should I continue trying to process new transactions while fighting about frozen funds?
This depends on your account status. If your account is frozen, you obviously can’t process new transactions. If your account is operational but has a rolling reserve or delayed payouts, continuing to process new transactions may make sense if you have sufficient working capital. However, be aware that new transaction volume may trigger additional scrutiny and some merchants find that the processor holds new incoming funds rather than releasing them, effectively making the problem worse. Consider using an alternative processor for new transactions while you fight about frozen funds from the original processor.