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July 05, 2022
by David Goodale

What To Do If PayPal Freezes Your Funds?

(Slightly edited from video transcript for greater readability)

Hello, David here at Today I will discuss a topic I hear mentioned from time to time. This topic is why has PayPal frozen your funds and what can you do to solve it? Stay tuned. I'm going to try and help in one second.

This video is about Payment Aggregators, not PayPal specifically

Let's be super clear from the beginning that this video is not an attack on PayPal. This point needs to be made early considering we are competing service providers. PayPal is a large Payment Aggregator which does not provide merchant accounts. What Payment Aggregators do is they accrue everyone's payments through their merchant account. They then disperse the funds from their merchant account to their customers. I have other content on the difference between a merchant account provider and an aggregator like PayPal. However, this particular video discussing a particular problem common to Aggregators which is the freezing of funds.

PayPal may see you as a risk

The reason why a Payment Aggregator like PayPal is freezing your funds, is they are most likely concerned about chargeback risk. There's some element of your business that has made them concerned that they could lose money. A chargeback is a dispute between a cardholder and a merchant. An example of a reason for a chargeback is when a customer has paid for a product or service but is unsatisfied, and the merchant has refused to, or is unable to help them.

PayPay may be worried may occur leading to chargebacks. It could also be because people pay for things, but they don't get them. For example, I might be a graphic designer and take on a big contract. What if it's a $10,000 job and I get halfway through but I never finish it? The cardholder is entitled to get what they paid for. If they paid for something that they never received, they would be due to get their money back. This scenario is not unique to any particular business. It's just to make the point that there are rules that Visa and MasterCard set that say a cardholder is guaranteed to get what they were promised. In the event the Merchant does not deliver, the payment processor, in this case, PayPal could be worried about potential chargeback liability.

Reasons your funds may be frozen

You can start the thought process on your own. Start by asking the question: "What is likely causing them to be concerned?" They're not just holding your money haphazardly. There should be a reason and that reason should be explained to you. If it can't be explained to you, maybe you can intuit it, or maybe you can reason out what it might be. For example, I have been working with a web developer, who's been doing some contract work. I sent him a payment and PayPal was holding the money because they did not understand that the service was rendered. I'm not an expert in PayPal invoicing, but my understanding is that you can make it clear somehow, or I believe you can, whether the service was rendered. This would close the loop on the non-delivery related chargeback risk and they might release your funds once that is addressed. Where possible, so long as it's true, make it clear that your service has been rendered.

Once the service has been rendered, the opportunity for dispute does not go away, but it is reduced. This is one of the downsides to working with a large aggregator. It's not an attack on PayPal. It's just, that they have many clients and offer more of a call center-based approach to service. That's where a traditional merchant account provider is a little bit different. If you are with PayPal and you're finding the support isn't ideal you may want to consider another service provider. You could try to find a merchant services provider. This is often more of a pain to deal with upfront. Where PayPal just lets you start processing (which is a tremendous benefit) there is a more detailed application process with a merchant account provider. On the flip side though, that's why some merchants have bumps in the road with an aggregator like PayPal, because the upfront application process was not as in depth. This can lead to some issues such as funds being held.

Payment Aggregators are reactive, not proactive

Payment Aggregators like PayPal aren't necessarily doing anything wrong, it's that they are reactive in their risk mitigation process to some degree. In contrast, a Payment Processor is proactive. Before I let someone start processing I ask several questions: "What do you sell? How much do you sell per month? When do you deliver it?" I formulate a list of annoying questions, but once you've answered them, we've figured it all out. It's then extremely unlikely that the carpets going to be pulled out from under your feet resulting in your funds being held. Again contrast this with some aggregators who will sometimes shut down the account. This can be very frustrating to business owners because they often can't get an immediate answer when this happens. This is a key difference between a Merchant Account provider and a Payment Aggregator.

Advice when contacting PayPal

I may not be able to recommend specific people you can call, but I will say to make it clear that the service was rendered. Help them at PayPal to understand that it's a well-known customer that you've worked with repeatedly. It's not their first order. Communicate it's a low-risk transaction and you know there's not going to be a dispute. Hopefully, they will do something to remove that block and get those funds in your hand.


There can be other reasons to hold funds not covered in this discussion related to compliance or other issues. It's almost always the case that PayPal (or the aggregator you're working with) is taking this action for a legitimate reason. However, if you understand the reasons for chargebacks it can help you to address any concern that arises. My hope is that after this discussion you can better understand what's happening on the other side of the fence. Thanks for watching. And have a good day there. Bye now.

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David Goodale About the Author

My name is David Goodale, CEO at Merchant I launched our business in 2001 and have over 20 years of expertise in the field of online payments. If you have a payments related question or project, and especially if it relates to multi-currency or international e-commerce don't hesitate to contact me. I'm always happy to help with an honest opinion, and enjoy chatting with folks from interesting businesses.

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