Payment Processor Account Freeze Demand Letters

• Read termination notice: Identify stated reason for freeze/termination
• Review merchant agreement: Understand processor’s contractual rights and your obligations
• Preserve evidence: Download all transaction records, customer communications, shipping confirmations
• Calculate frozen funds: How much is held? What is stated release date?
• Identify alternative processor: Don’t rely on appeal succeeding; secure backup payment processing
• File internal appeal: Use processor’s dispute resolution system first (exhaustion requirement)

Effective appeals address processor’s specific concern with concrete evidence:

Each platform has specific procedures:

• Stripe: Email support with “Account Review Request” + evidence package; escalate to legal@stripe.com if denied
• PayPal: Submit through Resolution Center; request supervisor review; escalate to Office of Executive Escalations
• Square: Reply to termination email with appeal; request Account Review team involvement
• Other processors: Follow stated appeals process in termination notice; document all communications

If internal appeal fails or is ignored, formal demand letter sets stage for litigation/arbitration:

• Breach of contract: Processor terminated without cause or failed to follow own TOS procedures
• Bad faith: Unreasonable freeze duration; failure to investigate evidence; arbitrary enforcement
• Conversion: Holding funds beyond reasonable reserve period without justification
• Unfair competition (CA): Cal. Bus. & Prof. Code §17200 – unfair business practice
• Damages: Frozen funds + lost business revenue + cost of alternative processing + interest

• Reserve period expires: 90-180 days passes with no chargebacks or claims
• Chargeback window closes: Credit card network chargeback period ends (typically 120 days from transaction)
• No basis for hold: Processor cannot articulate specific fraud/chargeback risk
• Settlement or court order: Negotiated release or court-ordered return of funds

Payment processors have valid business and regulatory reasons to freeze merchant accounts:

• Fraud prevention: Protect cardholders from merchant fraud; reduce chargeback liability
• Network compliance: Visa/Mastercard rules require processors to maintain low overall chargeback ratios
• KYC/AML requirements: Bank Secrecy Act and anti-money laundering regulations require identity verification
• Risk management: Sudden volume spikes may indicate stolen account, money laundering, or fraud
• Prohibited businesses: Card networks prohibit certain business types (illegal products, high-risk services)

When merchant challenges freeze via demand letter or arbitration:

• Document freeze basis: Specific chargebacks, fraud indicators, TOS violations
• Show TOS compliance: Freeze/termination followed procedures in merchant agreement
• Demonstrate risk: Chargeback ratio, complaints, fraud reports justify hold period
• Offer early release: If merchant provides proof of legitimacy, consider partial release or shortened hold
• Settlement value: Litigation/arbitration is expensive; releasing portion of funds may be cheaper than defending

• Broad TOS language: Agreement allows termination “for any reason” or “at our discretion”
• Arbitration clause: Forces dispute into arbitration (expensive for merchants)
• Reasonable reserve: 90-180 day hold is standard to cover chargeback window
• Legitimate business decision: Termination based on risk assessment, not arbitrary
• No damages: Merchant has no right to use specific payment processor; can use alternatives

Most processor agreements require arbitration:

• Stripe: Binding arbitration (AAA rules); merchant pays filing fee ($200-$300)
• PayPal: Arbitration for claims over $10,000; small claims court allowed for smaller amounts
• Square: Arbitration required; opt-out provision within 60 days of account creation (rarely used)

Arbitration Pros:

• Faster resolution (6-12 months vs. 2-3 years for litigation)
• Lower cost (if claim is under $75k, may be similar to litigation cost)
• Can compel document production from processor
• Arbitrator may be more sophisticated in fintech disputes than judge/jury

Arbitration Cons:

• Filing fees ($200-$2,000 depending on claim amount)
• Limited discovery compared to litigation
• No appeal (arbitration award is final)
• Processor has repeat-player advantage (same arbitrators see same defense lawyers)

For frozen amounts under state small claims limits:

• California: Up to $10,000 (or $5,000 for businesses in some counties)
• Advantages: Low filing fee ($30-$100); no attorney required; fast hearing (60-90 days)
• Strategy: Sue for conversion + breach; bring all evidence to hearing; request immediate judgment
• Processor response: May remove to arbitration if amount claimed exceeds small claims threshold

• Litigation cost: Processor’s legal defense will cost $20k-$50k+; settling for partial release may be cheaper
• Bad publicity: Processors sensitive to reputation; public disputes, social media pressure, media coverage can motivate settlement
• Regulatory complaints: File complaints with CFPB, state attorney general, BBB; processors track complaint metrics
• Pattern and practice: If processor has history of similar freezes, class action potential creates settlement pressure
• Early release offer: Propose reduced hold period (e.g., 30 days instead of 180) + modest reserve percentage

Parallel to legal action, file complaints with:

• Consumer Financial Protection Bureau (CFPB): Online complaint portal; CFPB forwards to processor requiring response
• State Attorney General: Consumer protection division; some states actively investigate payment processor practices
• Better Business Bureau: Processors maintain BBB ratings; complaint may prompt outreach from executive escalations team
• FTC: For deceptive practices claims (less effective for individual disputes)

Merchants win when they can show:

• Processor provided no specific evidence of fraud/chargebacks
• Freeze was pretextual or arbitrary
• Hold period far exceeds reasonable chargeback reserve (e.g., 180 days when merchant has 0% chargeback rate)
• Processor violated own TOS procedures (e.g., didn’t allow appeal)
• Business is legitimate with strong documentation

Processors win when they show:

• High chargeback ratio or fraud indicators
• Merchant violated TOS (restricted business type, fraudulent conduct)
• Broad TOS language allows termination “at any time for any reason”
• Reserve period is standard (90-180 days) and reasonable
• Merchant received notice and opportunity to appeal

• Draft and send demand letters to Stripe, PayPal, Square, Authorize.Net, and other processors
• File and prosecute arbitration claims under processor merchant agreements
• Negotiate early release of frozen funds or reduced hold periods
• Pursue breach of contract, conversion, and unfair competition claims
• Represent merchants in small claims court (for claims under jurisdictional limits)
• File regulatory complaints with CFPB, state AG, and FTC
• Advise on alternative payment processing options during dispute

• Defend account freeze and termination decisions
• Draft and enforce merchant agreement terms of service
• Respond to merchant demand letters and arbitration demands
• Advise on compliance with card network rules and banking regulations
• Negotiate settlements with high-value merchants
• Defend regulatory investigations and class actions

• Demand letter: Flat fee ($1,500-$3,000 depending on complexity)
• Arbitration: Hybrid fee (flat fee for filing + hourly for hearings, or contingency for high-value cases)
• Small claims representation: Flat fee ($1,000-$2,000)
• Litigation (if arbitration waived): Hourly or contingency depending on case strength

• Stripe account freeze ($150k frozen) – negotiated 30-day early release
• PayPal 180-day reserve dispute – arbitration resulted in immediate fund release + $40k damages
• Square termination (MATCH list placement) – overturned termination, account reinstated
• High-risk processor disputes (CBD, nutraceuticals, subscription businesses)
• Multi-merchant class investigation (pattern of unreasonable freezes)

Book a call to discuss your payment processor freeze. I’ll review the termination notice, assess your legal options, and recommend whether to pursue arbitration or negotiate settlement.

Email: owner@terms.law