The Complete Guide To Rolling Reserves
Merchant service providers may include a rolling reserve clause in their merchant agreement contracts. These rolling reserve clauses require merchants to fund a reserve account with a portion of their credit card transaction revenue.
Funding a reserve account can increase financial strain for merchants — but it is possible to mitigate the financial impact of a rolling reserve.
This guide takes a deep dive into rolling reserves and how to handle them, including explaining how rolling reserves work and why your business may have one.
Table of Contents
- What Is A Rolling Reserve?
- How Do Rolling Reserves Work?
- Different Types Of Reserve Funds
- How Much Is a Typical Reserve Amount?
- Can Any Processor Require A Reserve Fund?
- Can You Negotiate To Remove A Reserve On Your Merchant Account?
- What To Do If Your Merchant Account Is Holding Funds In A Reserve
- The Bottom Line On Rolling Reserves
- FAQs About Rolling Reserves
What Is A Rolling Reserve?
A rolling reserve is the practice in which merchant account providers withhold a portion (typically, 5-10%) of a merchant’s credit card transaction revenue to fund a reserve account. The reserve account is designed to cover the cost of any chargebacks that may occur.
The account “rolls” because eventually, the initial deposits will be released and refunded to you, while funds from new transactions are added to the reserve account.
Fortunately, merchant account providers only hold funds temporarily (usually for 6-12 months). Unfortunately, reserve accounts don’t accrue interest, so you won’t make any money on them.
Depending on how your reserve is structured, your provider might eventually refund all of your money and close the reserve account altogether.
How Do Rolling Reserves Work?
Merchant account providers issue credit when they disburse funds from accepted credit card transactions. Technically, a transaction isn’t settled until the 120-day chargeback period has ended, but providers typically deposit funds from your transactions within 1-2 business days.
If a customer files a chargeback after you’ve received funds from the sale, your merchant account provider will typically issue an immediate refund to the customer while the chargeback is being investigated. Merchant account providers recoup their customer chargeback losses from reserve accounts when the business is unable to cover the cost.
Reserve accounts also make it much less likely that a business will experience a merchant account hold, freeze, or termination. This is particularly valuable if you’re using a payment services provider (PSP), such as Square (see our Square Payments review) or PayPal.
Different Types Of Reserve Funds
There are two main variants of reserve accounts: capped reserves and up-front reserves. However, both are basically just modifications of rolling reserves. Here’s what you need to know about capped reserves and up-front reserves:
How Much Is a Typical Reserve Amount?
Reserve accounts typically withhold around 5-10% of your credit card transactions. The required balance in a reserve account may be variable or a fixed amount, but it should not exceed 100% of your monthly processing volume.
The terms of your reserve account are going to vary quite a bit from one provider to another. They’re also going to depend on factors that are unique to your business, such as your average monthly credit card processing volume, how long you’ve been in business, and many others.
Bear in mind that reserve account fees come in addition to the other expenses associated with maintaining a merchant account. This includes processing charges for each transaction, and recurring fees such as your monthly account fee, payment gateway fees, point-of-sale (POS) service fees, etc.
Can Any Processor Require A Reserve Fund?
Yes, any merchant services provider can require you to maintain a rolling reserve. This includes both traditional merchant account providers and payment services providers (PSPs).
Regardless of the type of provider you’ve signed up with, it’s virtually guaranteed that your contract will include a boilerplate reserve account clause in one form or another.
However, you’ll only be required to maintain a balance in your reserve account if it’s specified as a condition of being approved for a merchant account. This is typically spelled out in the Merchant Application portion of your contract.
Rolling reserves are typically imposed on high-risk businesses that would otherwise not be approved for an account and some low-risk businesses in special circumstances.
The most common reason for a low-risk business to need a rolling reserve is if the business owner has a low personal credit score. While rolling reserves are typically required when the account is first opened, they can also be imposed later on if the business suffers an unusually high number of chargebacks.
Why Most High-Risk Processors Require A Reserve Account
If you’re in a high-risk industry, you already know that high-risk merchant account providers are significantly more expensive than vanilla, low-risk accounts.
Both your recurring fees and your processing rates will be notably higher than what a comparable low-risk business would have to pay. If this wasn’t bad enough, your chances of being saddled with a rolling reserve are also much higher.
Let’s be clear: Not all high-risk merchant accounts require a rolling reserve. However, the following high-risk industries will almost always need to maintain a reserve:
- Businesses primarily selling unregulated or poorly regulated products or services (e.g., nutritional supplements, CBD products, etc.)
- Industries that have a significantly elevated risk of chargebacks (e.g., credit repair businesses, adult entertainment, etc.)
If this applies to you, you can expect to have to open and fund a reserve account as a condition of being approved for a merchant account. Depending on your processor, this might be an ongoing requirement for the entire time your account is open, or it might go away over time as your business grows (and doesn’t suffer too many chargebacks).
Can You Negotiate To Remove A Reserve On Your Merchant Account?
Unfortunately, the imposition of a rolling reserve is an underwriting decision, so you won’t be able to negotiate your way out of it. You might be able to adjust the terms of the reserve.
In most cases, the best way to handle rolling reserves is to prepare your business for the financial blow of funding a reserve account.
The terms and conditions of your reserve account will vary widely from one provider to another. As such, we recommend shopping around before making a final decision, particularly if you’re in a high-risk category or trying to get a merchant account with bad credit.
High-risk merchant account providers usually require long-term contracts and come with higher account fees and more expensive processing rates than comparable low-risk accounts. So, it’s critically important that you find a reputable provider that will help get you the best possible deal on processing services.
What To Do If Your Merchant Account Is Holding Funds In A Reserve
If you’ve shopped around for a merchant services provider and they’ve all told you you’re going to be subject to a reserve, you’ll need a plan of action for dealing with the inevitable consequences. Here’s a basic checklist of things to do before you sign up for a merchant account that includes a reserve:
The Bottom Line On Rolling Reserves
At this point, we feel that it’s important to re-emphasize the fact that most small businesses will not need to establish a reserve in order to get a merchant account.
Unless you have bad personal credit or you’re in a high-risk industry, you will probably be approved for a merchant account without having to maintain a reserve of any kind.
However, if you’re in a situation where you might be subject to a reserve account, you’ll want to gain a better understanding of how rolling reserves work and how maintaining one will impact your business’s cash flow.
You can start by taking a deep dive into credit card processing fees, since those will impact your cash flow every time you take a credit card payment.
Other merchant account fees will depend on the provider you decide to use.