Perhaps you’re a new merchant who just opened an account. You had a great first month and are anticipating a nice big profit with which you can pay off some of your business loans, write your paychecks, or even enjoy a nice bonus yourself. But at the end of the month you realize that only a fraction of your profits made it into your checking account. Where is the rest?
At this point, most merchants realize with dismay that they did not thoroughly understand the clause in their merchant services contract regarding merchant account reserves, which is an amount of money – either fixed or a percentage of the month’s sales – that is held in escrow by the merchant provider as an insurance policy against chargebacks or sudden bankruptcies that would leave them suddenly liable for your bills. While this is a risk management strategy, you can kind of think of it as a savings account. While not all merchant accounts require such reserves, they are almost universal among high-risk accounts.
Types of reserves
If you are a high-risk merchant, your account will almost certainly be subject to one of two types of account reserves.
Rolling reserves:
Rolling reserves are the most common type of reserve, where your merchant provider retains a certain percentage of each month’s sales for a set period of time (usually until that month’s chargeback window has expired). The percentage is set by your contract and may change at the provider’s discretion. Once the chargeback period for the first month (up to 270 days, often 180 days) is over, the reserve will be released. Next month, the second month’s reserves will be released, and so on. This can make for a difficult first six months until the first reserve is released, but after this initial dry period, you will experience a constant rollover of backpay, hence the term “rolling” reserve.
Fixed reserves:
Less common than rolling reserves are fixed reserves, in which the merchant must keep a predetermined amount of money in escrow. This may happen gradually through a capped reserved, where the merchant provider will take a portion of each month’s sales until the designated cap is reached, or through an up-front reserve, where the merchant pays the whole amount into an escrow account. In both of these cases, the funds are not released until the account closes, often not till after the last chargeback but can be up to 270 days.
Why reserves?
Although reserves often frustrate new merchants, there is a method behind the madness. The most important reason for these reserves is that it allows the acquiring bank or merchant providers to offer accounts to high-risk businesses that otherwise would not qualify. By mitigating their risk through these escrow funds, they are able to accept businesses that most banks reject. Your reserve is essentially a financial guarantee that the bank or processor will not be left holding the bag for chargebacks or refunds down the road should your business not survive your financial obligations.
What you can do
Although reserves are a normal part of managing a high-risk business, there are things you can do to minimize the amount of the reserve or at least keep it from climbing in the future. The most important part of this process is to mitigate chargebacks, since the lower your chargeback ratio, the less risky you are to your bank.
Reducing your chargeback ratio may involve many things, such as improving your fraud-prevention tactics, your marketing materials, your product pages, and even your return policies.
Fortunately, E-Commerce 4 IM has been helping high-risk businesses mitigate chargebacks of every kind for many years and has the tools and industry knowledge to help you succeed. If you are concerned about rolling reserves, need help to find a merchant account, have questions about merchant processing or need help with chargeback mitigation, give us a call at 1-800-570-1347. We would love to talk with you!
