Rolling reserve is an essential risk management and protection tool in merchant processing. This system works by putting a portion of each transaction into a reserve account, which acts as a real-time forced savings account that the merchant can keep track of.
The rolling reserve agreement’s terms can vary, with some agreements capping the reserve amount while others leave the funds in reserve indefinitely.
When looking for a payment processor, it’s essential to understand the concept of rolling reserves, as some processors may provide this option. Understanding rolling reserves and their implications for your merchant account is critical for all businesses.
Rolling reserves are a strategy banks use to ensure the merchant’s and the bank’s financial stability. The bank reduces the risk of potential chargebacks by collecting some funds through credit card transactions, thereby protecting the merchant’s account.
The acquiring bank is in charge of calculating the rolling reserve amount based on the merchant’s transactions. This calculation determines how long the acquiring bank will keep rolling reserves until the account is closed and the funds are released.
What Exactly is a Rolling Reserve?
In merchant services, a rolling reserve is a common practice in which the processor sets aside a portion of each transaction in a non-interest-holding account. This reserve is set up to protect the processor from financial losses if some merchants commit fraud or fail to deliver on their promises.
The amount held in reserve varies, but it is usually between 5 and 10% of a merchant’s gross credit card sales. The reserve funds are kept for a period ranging from six to 18 months.
A rolling reserve safeguards against chargebacks, providing the financial institution with the liquidity needed to cover potential losses. While this reserve can harm a merchant’s cash flow, it is a necessary step for merchants in high-risk industries.
The terms of a rolling reserve can vary depending on the level of risk the merchant assumes, and the specific requirements will be outlined in the merchant agreement. The reserve money is held for a fixed period, during which the merchant cannot use them to cover typical business expenses.
Finally, a rolling reserve is an essential component of merchant services because it protects both the financial institution and the merchant from financial losses caused by chargebacks. The merchant’s risk level and the requirements outlined in the merchant agreement will determine the reserve’s exact terms.
How do Rolling Reserves Operate?
Rolling reserves are an essential credit card processing aspect that protects merchants and processors. They work at the transactional level, and the reserve is transferred to the payment processor’s non-interest-bearing account.
This reserve protects processors from chargebacks, which are a significant source of losses. The reserve account allows the bank to quickly access funds if many chargebacks occur and the bank cannot access the merchant’s standard checking account.
Understanding rolling reserves are essential for understanding the credit card processor as a whole. When a customer makes a payment, the issuing bank receives the payment after some time, and instead, it expects the customer to pay the balance by a specific date or in installments.
Credit card processors, in turn, give the acquiring bank credit, releasing funds to the merchant. Although the funds may appear in the merchant’s bank account within a few days, the customer has up to 120 days to dispute the transaction and file a chargeback.
In such cases, the merchant is liable for the chargeback costs, and the credit card processor immediately refunds the cardholder. When it comes to credit card processing, some companies will require rolling reserves to help cover the costs of chargebacks and prevent overexposure.
The rolling reserve contract’s terms will vary, but the goal will be to provide quick and easy access to funds to cover chargeback costs.
While the merchant’s account is in good standing, it is a common misunderstanding that the processor is using the reserve funds to pay chargebacks.
The funds to repay chargebacks are deducted from the merchant’s bank account rather than the reserve account. The reserve account is only activated when the merchant account is shut down or closed, and any chargebacks that occur must be paid by the bank.
Expiring of the rolling reserve
Rolling reserve agreements come in various sizes and shapes, each tailored to the level of risk associated with a specific account. The reserve percentage may fluctuate for a high-risk account, with a cap of 10% of the account’s monthly processing volume.
When this limit is reached, the processor will cease gathering reserves and keep the funds in a reserve account until they are satisfied with the merchant’s processing history.
Suppose the merchant account is accidentally closed by the processor or the merchant. In that case, the bank has the right to retain funds for a period of up to 180 days, corresponding to a 6-month chargeback liability period. Charges can be disputed for up to six months after the date of the service or transaction.
During this time, the funds are held by the processor anticipating any potential chargebacks. However, the bank usually releases most funds sooner if no chargebacks occur after termination.
Do You Need a Rolling Reserve and How Does It Impact Your Business?
A rolling reserve is the amount of money that a merchant must set aside for a set period to cover potential chargebacks or other credit card processing risks. This reserve is not a fee but a portion of your transactions that the processor temporarily holds before being returned to you.
A rolling reserve significantly impacts your cash flow because it restricts access to the total amount of your transactions. On the other hand, the reserve can serve as a safety net, preventing you from incurring multiple chargeback fees and avoiding adverse effects on your cash flow.
Because the merchant services provider determines it, not all businesses must maintain a rolling reserve. High-risk industries, historically high chargeback rates, poor credit ratings, no prior experience with credit card processing, or long delivery windows for services or goods are all common reasons for rolling reserves.
Assume you’re thinking about opening a merchant account with a rolling reserve. In that case, it’s critical to carefully review the contract’s terms, such as the percentage taken from transactions, holding times, and any other restrictions.
On the one hand, a rolling reserve can impact your company’s growth by restricting cash flow and limiting your ability to invest in marketing and added-value purchases. However, if you have a rolling reserve and incur numerous chargeback fees, this can help your cash flow.
Finally, the decision to use a rolling reserve merchant account should be based on carefully evaluating the potential risks and benefits and whether this type of safety net is appropriate for your business.
What are the Advantages of a Rolling Reserve?
Rolling reserves are essential to financial stability and a valuable tool for high-risk businesses. Companies can mitigate risk and secure a merchant account more efficiently by setting aside funds while benefiting from lower rates and a broader selection of merchant service providers.
This reserve works in the same way as a forced savings account, providing businesses with a consistent source of funds for unexpected expenses and financial obligations, improving cash flow, and allowing for better budgeting decisions.
A rolling reserve can also boost investor, lender, and stakeholder confidence by lowering overall financial risk and mitigating the impact of unexpected events. With a rolling reserve, high-risk businesses can enjoy premium rates and features that would otherwise be unavailable while only experiencing a minor delay in their funds.
What are the Cons of a Rolling Reserve?
Rolling reserves can cause problems for businesses in a variety of ways. One of the most serious issues is a lack of cash flow, which limits their ability to run day-to-day operations and pursue growth opportunities.
Another issue is a lack of clarity, as rolling reserves can be confusing and difficult to understand. Managing a rolling reserve has challenges; tracking and reporting on the reserves can take significant time and effort.
Access to funds may be restricted in some cases, making it difficult for businesses to adapt to changing circumstances or make essential investments. Finally, a rolling reserve can harm a company’s credit score, making it difficult to secure future funding and stifling growth and development.
Additional Reserve Fund Types for Credit Card Processing
Processors are constantly looking for new ways to reduce a bank’s risk in approving your merchant account. The processor will determine the account’s suitability through careful examination and underwriting. In cases with inherent risk, The processor will discover the least intrusive reserve structure that benefits you and meets the risk department’s requirements.
Aside from a rolling reserve, some of the most common reserve structures used by processors include capped and up-front reserves, the two main types of reserve merchant accounts. Here’s a quick rundown of each:
All parties involved establish and sign a predetermined limit before the merchant account is approved in a capped reserve scenario. The capped reserve amount is set at a specific value, such as $30,000, and a percentage of each transaction is kept by the processor until the reserve reaches that amount.
There will be no more reserves taken from future transactions at this time. The standard percentage rate of withholding is 10%. For example, $10 will be deducted from a transaction of $100 by the processor.
It is important to note that capped reserves limit the money that can be deposited into the reserve account. The cap is typically calculated as a monthly processing volume percentage ranging from 50% to 100%.
For example, if a company processes $10,000 monthly and the processor imposes a 50% capped reserve, the threshold is met once the reserve reaches $5,000, and no additional funds are held. Unfortunately, most limited reserves are not returned to the merchant and remain with the processor until the account is closed.
Up-front reserves are a rare account in the world of credit card processing. This system once debits a large, previously agreed sum from the merchant’s account. This method is typically used for businesses with high cash flow and low operating capital, such as ticketing companies.
However, new businesses are only sometimes eligible for this type of reserve due to a lack of funds to meet the large reserve requirement.
Minimum or up-front reserves require merchants to have funds available before beginning to process credit card transactions. To fund the reserve, the merchant must either obtain a credit letter from their bank or transfer money from a checking account.
On condition that the merchant lacks the required cash or credit, merchant account providers sometimes hold all funds until a predetermined reserve balance is reached.
Payment processors use rolling reserves as risk management to protect against potential losses from merchant processing activities.
Although they may appear unfavorable, rolling reserves can allow businesses to secure a merchant account they wouldn’t be approved for. Consider negotiating a lower reserve amount or even eliminating it altogether when it comes time to renegotiate with a processor.
Its actual rolling reserves can cause cash flow issues and impact merchant profit margins. However, it is critical to ascertain whether the reserve is temporary or permanent. Lifting the reserve and obtaining a standard merchant account is possible over time.
Negotiating rolling reserves is possible, and you can reduce the percentage or reserve amount with professional assistance. The ultimate goal should be to remove the reserve entirely eventually. While rolling reserves are not ideal, they can allow your company to grow and improve if approached correctly.