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Rolling reserves are a type of risk mitigation set forth by the processor to account for any losses they may incur from merchant processing activity. Here’s how it works: a reserve account is set up where a percentage of each transaction is taken and put into a non-interest-bearing account (similar to a forced savings account). The merchant always has access to this account and can see the rolling reserve accrue in real-time. Depending on the rolling reserve agreement, the reserve amount is either capped at a certain price point or is left on the account indefinitely.
What is a Rolling Reserve?
A rolling reserve is where the processor withholds an agreed-upon percentage or amount on each transaction. This is usually an addendum to your merchant agreement. The money reserved is placed in a non-interest-bearing account.
During the merchant application process, the processor’s underwriting department will conduct their due diligence and background checks on the merchant. This is so the processor does not incur financial losses. Each merchant account deposit (from processor to merchant) is essentially a microloan in good faith. The processor is hoping and assuming the merchant will uphold their end of the deal (i.e. goods and services promised to the cardholder), as this isn’t always the case. Some merchants commit fraud, money laundering, and don’t deliver on their promises. One way to mitigate this risk and exposure is to institute a reserve whether it be rolling, upfront, or static.
How a Rolling Reserve Account Works
Reserves are taken out at the transaction level and moved into a non-interest-bearing account maintained by the payment processor. You, as the merchant, will have access to see that account accrue whether that’s on your month-end processing statements, or inside a login/portal. A rolling reserve means that the reserve is in place in an ongoing fashion until the processor is comfortable with an accrued amount or successful processing history (little to no chargebacks). It’s important to note the majority of losses incurred by the processors are a result of chargebacks.
The entire reason for the reserve account is for the bank to have somewhere to draw from to pay off those chargebacks and refund the cardholders.
There is a common misconception that the processor uses reserve money used to pay chargebacks while the account is open and in good standing. This is false. The money to repay chargebacks is debited from your bank account. It is not taken from the reserve account. If the merchant account is closed or shut down, then the bank draws from the reserve account to pay any chargebacks that roll through. Since the bank may not have access to your normal checking account, this gives them little recourse should a slew of chargebacks roll in. This is where the reserve account comes into play.
What happens when a rolling reserve ends?
Not every rolling reserve agreement is created equal. Depending on the level of risk, the rolling reserve percentage will vary and the reserve amount will fluctuate. For instance, a high-risk account may have a reserve of 10% capped at one month’s processing volume. This means that once the account reaches the specified amount of time/dollar value, the processor will stop taking a reserve. The amount will then live in the reserve account until the processor feels comfortable with the merchant’s processing history.
In the unfortunate event that the merchant account is shut down by the processor, or if the merchant voluntarily closes their account, the bank reserves the right to hold funds for up to 180 days. The 180 days (6 months) corresponds to the chargeback liability period. In the United States, the chargeback liability period is 6 months from the date of the transaction or service rendered. This means that the cardholder has up to 6 months to dispute a charge. The processor holds the funds in anticipation of those chargebacks rolling through. If in that period, post-termination you do not receive any chargebacks, the bank will often release the majority of the funds sooner.
What is the Difference Between a Rolling Reserve and a Static Reserve?
A static (or capped) reserve is similar to a rolling reserve, except it takes a percentage of your transactions until it reaches the specific dollar amount specified in your reserve agreement.
A rolling reserve takes a percentage of your transactions for the duration specified in your reserve agreement.
In both cases, there is room to negotiate the terms of your reserve agreement. When you process a significant amount of money and see a small number of chargebacks after a 6 month period, you have more leverage to negotiate a lower reserve or even the removal of the reserve.
How Is Your Business Affected by a Rolling Reserve?
A rolling reserve does not affect your business in any other area than your cash flow. The reserve is taken out at the transaction level, so it will not affect your monthly budget.
Keep in mind, the reserve is still your money. It is not a fee. After the specified period in your reserve agreement, the processor will return the funds to you, assuming you do not incur too many chargebacks.
Benefits of a Rolling Reserve
- The biggest benefit of a rolling reserve is that it helps you secure a merchant account for your high-risk business. High-risk businesses often face the struggle of convincing a processor to take on their risk. Rolling reserves are meant to ease this process.
- Secondly, a rolling reserve is comparable to a forced savings account. You are “forced” to put aside a set amount of money, providing you with extra capital once the money is returned to you.
Disadvantages of a Rolling Reserve
- A rolling reserve affects your cash flow, as a small percentage of every transaction is withheld.
- Once the account is shut down by the processor, they have the right to hold the funds for up to 180 days (due to the chargeback liability period)
Other Types of Reserve Funds For Credit Card Processing
Contrary to popular belief, processors are continually looking for ways to successfully mitigate a bank’s risk to approve your merchant account. After a series of due diligence and underwriting, the processor will deem the account boardable. If there is a level of the inherent risk involved with the account, the processor will find the most frictionless reserve structure that will work for you, and also appease the risk department.
In addition to a rolling reserve, below are the most common types of reserves the processors implement:
Capped Reserves
In a capped reserve scenario, an agreed-upon threshold is put into effect and signed prior to the approval of the merchant account. For instance, if the capped reserve is set at $30,000, that means the processor will withhold a percentage of each transaction until the reserve account reaches $30,000, at which point, no more reserves will be taken out of future transactions. Usually, a capped reserve is accompanied by a withholding percentage rate. The most common is 10%. This means that the processor will withhold 10% of every transaction.
For example:
On a $100 transaction, the processor will withhold $10.
Up-Front Reserves
In this type of reserve, the processor will do a one-time debit to the merchant’s account for a large agreed-upon sum. Up-front reserves are uncommon and typically used in cases where the business is cash flow heavy and has a large amount of operating capital. This is also common among businesses that collect advanced payments and tend to see a high amount of chargebacks, like ticketing businesses. Up-front reserves are almost never put into effect for new businesses, purely because new businesses do not have the funds to comply with the large reserve required up-front.
Final Thoughts
A rolling reserve is a form of risk management implemented by the payment processor to cover any losses they may suffer from merchant processing activities. Now you know how this type of account works, what happens when it ends, and how your business will be affected. Other types of reserve accounts we covered include capped reserves and up-front reserves.
A rolling reserve, though often seen as a negative, is not. Instead, consider it an opportunity for businesses to obtain a merchant account that otherwise would not be approved for processing. When it comes time for renewing or updating an existing agreement with a processor, you may want to consider negotiating for either a lower rate on your reserve amount or even removing it altogether.
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