Merchants can feel overwhelmed when they sign on for credit card processing. Getting a merchant account to have the ability to accept and process credit and debit cards requires many elements, a number of which are unknowns until businesses are in the thick of the process.
One of those elements that many businesses are unaware of are merchant account reserves, which are set amounts of a merchant’s money that is put into a separate account by an acquiring bank. It is similar to a security deposit that is held when a person rents an apartment. It protects a bank for unplanned liability.
Reasons Acquirers Require a Merchant Account Reserve
Acquirers keep funds in a reserve similar to the way banks require equity for a loan. The funds are held in until chargeback time limits expire. If a transaction moves ahead without a chargeback, the reserve is not touched. But, if a shopper disputes a transaction, the acquirer could use the reserve funds to repay the person.
In other words, it’s an escrow fund that protects the acquirer from financial losses.
Even if a merchant business account doesn’t hold enough money to cover a chargeback, a bank won’t be on the hook to cover the disputed transaction.
What Types of Businesses Need Merchant Account Reserves?
Though every processor has its own rules and criteria for requiring merchant account reserves, risk levels is one of the biggest factors. In general, all high-risk merchants, such as those involved in gaming, adult entertainment, or CBD, must submit a reserve.
Typically, a reserve is required at the time a merchant account is approved. However, if a business’ risk level changes, such as it begins accruing more chargebacks, a processor can require a reserve.
Merchants often require merchant account reserves if they:
- Sell high-risk products or services
- Sell products with high average ticket prices
- Have high volumes of monthly transactions
- Process contactless transactions
- Operate in sectors with high chargeback ratios
Understanding the Different Types of Reserves
Processors can use three different types of reserves, including:
- Rolling Reserve Accounts: These are the most common types. This is when a percentage of each credit card deposit, which is often between 5% and 10%, is held in a reserve for up to one year. Rolling reserves are released gradually. After the agreed upon period is up, the acquire releases funds back to the merchant each month.
- Capped Reserve Accounts: This type of account keeps a percentage of each card transaction until a fixed amount is reached. The amount often is equal to half of a merchant’s monthly processing volume. However, it may be as high as entire month’s processing volume. Unlike rolling accounts, these funds are held in the reserve until the merchant agreement expires.
- Upfront Reserve Accounts: This type of reserve is the amount of money that is based on projected monthly volume that must be placed into escrow when a processing agreement is signed. Upfront reserves can be funded with:
- A letter of credit from the merchant’s bank
- Transfer the funds from another bank account
- Permit an acquirer to retain all credit card transaction deposits until the required reserve is met
How Reserve Amounts are Determined
Each processing agreement outlines the terms and required minimum balances of reserve accounts. Every processor has its own criteria, but most consider business models, credit histories, and reputations for chargebacks.
When Acquirers Hold Reserves
If an account is not in good standing, then a bank will terminate a processing agreement. When this occurs, the reserve is extended for an unknown period of time. IN most cases, reserves are not released until all risk has passed.
Merchants looking to process credit cards need to know what to expect. Many should expect to need to put up merchant account reserves.
Apply for Merchant Account Services
If you are a business interested in obtaining a merchant account, contact eMerchantBroker.com. EMB works with all types of businesses, including those in high-risk sectors. Apply online today.