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Understanding Merchant Account Reserves for 2024

A piggy bank, a calculator and a wallet with money in it to represent saving money in a merchant account reserve balance
Two people with a calculator, a pencil, and spreadsheets to represent reviewing a merchant account reserve balance on a merchant statement

Merchant account reserves are an essential element of the payment processing industry, as they help to ensure the security and stability of both merchants and processors. They can also help merchants establish trusting, long-term relationships with their processing banks by maintaining consistent processing history. However, reserves are not always viewed as the valuable agreements they really are. In this guide, we’ll cover the basics of merchant account reserves, including the different types of reserves, why processors need them, and how merchants can negotiate and access their reserve funds.

What Is a Merchant Account Reserve?

A reserve is a portion of a merchant’s sales set that is set aside by the processing bank as a safety net to offset any future liabilities incurred on the account. The purpose of a reserve is to provide security to both merchants and processing banks, ensuring funds are available in the event of any financial losses.

The percentage of sales held in the reserve account depends on each merchant’s processing volume and risk level. The reserve funds live in a separate account and will be released back to merchants over time if the account remains in good standing.

What is the average withholding amount?

The reserve amount depends on the processing bank and the individual business. On average, most banks require a reserve of 5-10% of the merchant’s expected monthly sales volume.

What Merchants Are Required to Have a Reserve Account?

Merchants with higher than average chargeback liability risk typically see reserves because of industry type or future delivery operations. For example, travel merchants often have reserves because events can be canceled at any time, due to weather or other unforeseen issues. Customers can then charge the transactions back, leaving processing banks responsible for covering any financial losses.

However, any merchant can receive a reserve if their processing bank determines there is a high level of risk associated with their processing. Let’s take a look at some common industries that frequently have reserves:

  • Adult
  • Travel
  • Tech Support
  • Sports Betting
  • CBD
  • Firearms
  • Tobacco & Vape
  • Debt Consolidation

Do all high-risk accounts have a reserve?

No, not all high-risk merchant accounts carry reserve accounts. It is up to the processing bank to decide if the merchant must fund a reserve after reviewing their business and its processing history.

The 3 Different Types of Merchant Account Reserves

Within the reserve umbrella, there are three different types of merchant account reserves. They include rolling reserves, capped reserves, and up-front reserves. We explore each of their unique details below!

1. Rolling Reserve

A rolling reserve is a percentage of a merchant’s processing volume that is held in a reserve account until the payment processor feels comfortable with the accrued amount—usually after six months to a year of healthy processing. Processing banks may release funds from the reserve over time, but the reserve can stay on accounts indefinitely if warranted.

2. Capped Reserve

A capped reserve is a percentage of a merchant’s processing volume that is held in reserve until it reaches the specified cap. The capped amount is typically a fixed number the processing bank determines based on the merchant’s risk level. Once the cap is reached, no more funds will be taken out of future transactions.

3. Up-Front Reserve

An up-front reserve is a lump sum of funds a merchant pays upfront to their processing bank. The amount of these funds is usually 50-100% of the merchant’s monthly processing volume. If merchants can’t fund the up-front reserve amount, it may be collected by putting 100% of their transaction funds into the reserve account until the required amount is reached.

Why Do Merchants Need to Have Reserve Accounts?

Reserve accounts are in place to help processing banks mitigate their risk when approving merchant accounts. They are used to protect from potential losses associated with high-risk transactions due to chargebacks, fraud, and other events related to a merchant’s processing activities. To put it simply, reserves are an easy way to ensure merchants pay back what they owe.

If I don’t get any chargebacks, can I renegotiate the reserve amount?

Yes, if you don’t receive chargebacks, you may be able to renegotiate the terms of your reserve amount, but only after about six months of actual processing. For instance, if six months go by and you’ve only processed transactions in three out of the six months, the bank may need three more months of processing before negotiating your reserve. After examining your risk level, the bank will determine if they are willing to adjust the terms of your reserve.

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What is the process like when negotiating a reserve?

If you’d like to negotiate your reserve account, there are some ground rules. As stated above, it varies by the processor, but generally, you may negotiate your reserve amount if you demonstrate a good track record of processing and suitably manage chargebacks.

We recommend reaching out to your merchant account representative to handle the negotiation for you. Usually, your rep will place a release request to the risk department in writing, listing any and all reasons why your account isn’t at an elevated risk for financial exposure. The bank will deliberate internally and reach out with a formal decision. This entire process can take as little as four days, but it normally lasts two weeks.

Note: Some processing banks have strict policies in place and are unwilling to negotiate the reserve amount. In this case, it’s a good idea to consider partnering with a merchant services provider willing to negotiate your reserve.

How to Obtain Reserve Funds Being Held in your Account

If you want access to your reserve funds, you can do a few things to get the ball rolling. First, communicate with your payment provider to understand their process for holding funds. For example, some processing banks may release reserve funds on a regular basis, such as monthly or quarterly, while others may only release funds upon request.

Most processors have a general rule of reviewing requests after about three months of excellent processing, so asking anytime before that is not recommended. Once the processing bank has reviewed your account records, they may release some or all of the funds being held in the account.

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How you can get your funds after account termination

If your merchant account is terminated, the processing bank can legally hold onto your reserve funds to cover any exposure on their end for as long as stipulated in your merchant agreement. Banks usually hold reserve funds for 180 days post-closure. Since chargebacks can be filed six months after a product is delivered, processors must ensure they have a cushion to fall back on. Once this period is over and they’ve determined there is minimal financial risk associated with your terminated account, your reserve funds (minus any losses) will be released to you.

Note: In most cases, your processor will provide specific information about how to obtain your funds after account termination in your merchant agreement and/or reserve addendum.

Check to See if You Qualify for a Merchant Account With No Reserve

If you operate in a high-risk industry or have increased exposure to chargebacks for any reason, it’s beneficial to check with your processor to see if you qualify for an account with no reserve. If you don’t, no sweat—having a reserve in place can provide peace of mind in case of any financial setbacks. Additionally, maintaining a strong track record of processing transactions and managing chargebacks will help you to renegotiate and release your reserve funds successfully. And when you partner with an experienced merchant services provider offering the right tools and resources for your unique business, you can effectively mitigate the financial losses associated with high-risk payment processing.

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Frequently Asked Questions

Can I choose between rolling, capped, or up-front reserve?

No, the processor will choose the type of reserve account based on your details.

When will I get my reserve funds back?

If your merchant account is still open, you can request a release of reserve funds after three to six months of actual processing. If your account has been closed, you will typically get your reserve funds back after 180 days post-closure.

Do I have access to the reserve account?

You can always see the reserve account balance in real-time as it accumulates, but you cannot touch the money.

Where can I see my reserve balance?

You can usually view your reserve balance and merchant-level data online through your processor’s portal. If you don’t have access to the portal, your reserve balance will be on your monthly statement in its own section.

Will the reserve account be used to pay off chargebacks?

No, this is a common misconception. When an account is active, the merchant pays chargeback fees as they are incurred. The reserve money is only used when the merchant account is shut down, not for day-to-day usage on an active account.

Can I earn interest on my reserve account?

Unfortunately, no. These accounts are non-interest bearing for both parties involved and sit in an escrow account.

Yes, merchant account reserves are entirely legal and mentioned in your processing agreement.

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