This phrase caught my eye in the story "Per the network regulations, the debit process is automated and will continue to attempt to hold the funds associated with the dispute until it is resolved.".
Network regulations like the contracts they have with banks? Credit card processors? A relatively small startup may or may not be in a position to negotiate their own terms on such things, they're dealing with established players they have to do business with unlike a lot of other startups in other fields. Perhaps Squares own terms have been influenced or dictated to them in part by their own financial partners.
On the other hand, this persons own bank was able to reverse the automated charge and the fees associated with it, which itself should give at least some measure of comfort in the system as it exists, even if it's frustrating to watch it all happen without much direct control.
It should probably be obvious that having a buffer of funds to handle things like this is a good idea for any business, particularly if the terms of service for the payment processor note that things like this may happen.