Will a Merchant Account Reserve Withhold Revenue?
What is a Merchant Account Reserve?
What’s the Purpose of a Reserve?
The funds in a merchant account reserve are similar to equity required for a loan. Acquiring banks are essentially extending a line of credit to merchants until the chargeback time limit expires.
If a transaction clears without a chargeback, the funds in the merchant account reserve are safe. However, if a transaction is disputed by the cardholder, the reserve funds could be used to repay the consumer.
The merchant account reserve, which is essentially an escrow fund, ensures the acquirer doesn’t need to worry about suffering financial loss. Even if the merchant’s operating account doesn’t have sufficient funds to cover the chargeback, the bank won’t be liable for the transaction dispute.
Who is Required to Have a Merchant Account Reserve?
Each processor has its own regulations and qualifying criteria for merchant account reserves. However, the level of risk the merchant presents to the processor is one of the biggest factors in determining if a reserve is necessary.
Generally, all high-brand risk merchants need a reserve, and the reserve is usually enacted from the very beginning of the merchant processing agreement. However, any merchant can be subjected to a reserve at any time. If the merchant’s risk escalates, the processor’s risk protection must also increase.
Generally, those merchants who are forced to implement a merchant account reserve have the following characteristics:
- Process card-not-present transactions
- Sell specific products or services determined to be risky
- Have high average transaction amounts
- Have high monthly processing volume
- Are in an industry with high chargeback rates
Are There Different Types of Reserves?
Rolling Reserve
Rolling reserve accounts are the most commonly used type of reserve accounts. A percentage of each credit card deposit (usually 5-10%) is held in reserve for about 6 to 12 months.
A rolling reserve will gradually release held funds. Once the predetermined time period has expired, the acquirer will begin releasing funds each month. The earliest withheld amounts will be released first; for example, fund held in January will be released in July.
Capped Reserve
A capped reserve account retains a percentage of each credit card deposit until a fixed (capped) amount is reached. The fixed amount is typically half the merchant’s monthly processing volume, but may be as high as a full month’s volume.
Once the capped amount has been reached, no additional funds will be held, but the money will remain in reserve for the duration of the merchant agreement.
Up-Front Reserve
Based on the expected monthly volume, an up-front merchant account reserve is the amount of money that must be placed into escrow at the beginning of the processing agreement.
To amass the needed funds, merchant can:
- provide a letter of credit from their bank
- transfer the necessary funds from another account
- allow the acquirer to withhold 100% of credit card transaction deposits until the reserve has the necessary balance
Who Determines the Reserve Amount?
When is the Money Released?
Technically, the funds in the non-interest-bearing reserve are the merchant’s, but the release of funds to the merchant will depend on the type of reserve implemented.
For example, a temporary reserve might only be needed until the perceived risk has passed. After a predetermined time period, the acquirer will review the situation. The reserve funds will either be returned or the hold will be extended.
Other reserves might not be released until the merchant account is closed in good standing.
A terminated processing agreement that is enforced by the bank means the account is not in good standing and the revenue hold will be extended indefinitely. In these situations, funds will be held until all risk has passed. Since most chargeback time limits are 120 days, the reserve will retain the merchant’s funds for the duration of that time.
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