So here is how the scam works, once one of the merchant providers hint at a problem with a merchant, they will begin applying restrictions, making unreasonable demands and reducing limits, all in the efforts to distract the end merchant. When the merchant eventually falters, the merchant service provider will hold back several weeks of processing volume and terminate the account. Because a terminated merchant cannot typically process in the United States, they typically go out of business. While so merchants do manage to stick it through, it doesn’t matter because the merchant account provider will have eaten up virtually all of the held funds in “research fees” and other axillary charges for a problem they initially created.

Many times merchants will feel “I am not doing anything wrong” only to find themselves on the wrong end of this deal. The reality is that every merchant from time to time experiences problems or ups and downs with their chargebacks, that’s the nature of the beast. But if you are on the wrong end of the merchant service provider, you could soon be out of business.

Rumor has it that more and more merchant account providers are holding merchants hostage and ultimately terminating merchants for little or no basis for the simple reason that they are looking to hold their funds in reserve. What most merchants don’t realize is that merchant service providers will often hold their funds for up to seven months after they have terminated their contract and what’s more frustrating for many merchants is that often these service providers will eat up any reserves with extra fees and charges in “researching” their terminated account.

I’ve seen this happen with many merchants already in the past few years, many of which have lost over one hundred thousand dollars (each!) to merchant providers. The assumption, of course, is that this is limited to a few select “underground” providers but, in fact, this is a problem that affects the entire industry and includes such names as Heartland Payments (NYSE HPY), Optimal Group (Nasdaq OPMR), and even NPC which was acquired by Bank of America (NYSE BAC).

My hope for 2008 is that the SEC and FTC start to investigate some of the larger shady companies and start to ask why some of these companies have so much cash on the books without a reason to justify it. Certainly Wall Street may love them but there is more than meets the eye.