Why Not Understanding the “Rolling Reserve” Could Put You Out of Business
There’s a little known risk management tactic that the bankcard industry is using with increased frequency these days called the “rolling reserve” or holdback. For those of you that don’t know what it is, here’s a quick definition:
A strategy used by credit card processors, acquiring banks or MSP’s (merchant service providers) to lower the risk profile of merchants that would otherwise not qualify for a merchant account based on current underwriting guidelines. The rolling reserve gives the above mentioned institutions the right to withhold a percentage (usually 5-10%) of gross sales from the merchant for a specific time frame in a non-interest bearing account to cover for the possibility of fraud or chargebacks.
The horrible economy that we’re currently facing has caused those involved with the processing of credit card transactions to act like paranoid crack addicts, but is it for good reason?
Bankruptcies are a dime a dozen these days, so overcome by the fear of losing money, the processors pass their risks on to us merchants instead. I read a BusinessWeek article the other day that does a pretty good job of explaining everything.
The recession and rising business bankruptcies have prompted giant credit-card companies such as Denver (Colo)-based First Data and Atlanta-based Elavon to demand that some business owners maintain a cash reserve with the processors in order to protect against the possibility that customers may require refunds after the merchants have gone belly-up.
As a merchant, so long as you can accommodate for that missing cash flow, then you won’t have any problems, but in some cases having 5 to 10% of your sales withheld from you, could put you under. Especially if a large part of your business comes from credit card transactions.
Personally, I think the risk should be spread across all players involved; merchants, ISO/MSP’s, the acquiring banks and the processors. Seriously, instead of forcing the merchant to accept a certain percentage (5-10%) that you dictate, why not ask them what they can handle? I mean, don’t these guys understand that if the small-business goes bankrupt, everybody loses? Wait, who am I kidding, that’s like trying to tell Tony Soprano to stop with the extortion.
Anyway, your only option as a merchant right now is to make sure you understand what the rolling reserve is, what percentage of your money the processor is planning on withholding, and whether or not you can even stay in business without that cash flow. If not, then I would seriously consider alternative payment methods until you feel you have enough of your own reserves to cover the stinkin’ rolling reserves.
Finally, if you have questions or concerns about PayPal’s rolling reserve policy – and a lot of PayPal merchants do – you can consult this resource from PayPal.