A merchant account works just like a line of credit that a consumer is given with a regular credit card. It is, in effect, a line of credit issued to a business by the acquiring bank. The processor and bank forward you the funds from a credit card transaction BEFORE they actually receive the money from your customer’s bank.
Customers have up to 6 months, in most cases, to contact the card-issuing bank to request that the transaction be reversed. The rolling reserve (RR) is a type of reserve account (and a subaccount of your merchant account) that the acquiring bank creates to hold your funds (generally 5% to 10% of your credit card transaction funds for 180 days). The bank releases this amount to you in arrears — so if the term is 10% RR 180 days in arrears, then in month 7 you get paid back for month 1, month 8 pays back month 2, etc. The money held in an RR is non-interest bearing.
The processing company sets up reserve accounts to ensure it is covered in the event of a fraudulent merchant or customer, or for businesses that experience a higher than average rate of chargebacks. An RR is generally put in place for offshore merchants and some higher-risk domestic merchants on a case-by-case basis.
We have also seen flat rate reserves where a merchant’s monthly volume is taken into consideration and a reserve is implemented based on that. For instance, if your monthly volume is $25,000, your reserve might be $25,000, then capped at that.
These funds may just be held in a reserve account and possibly reduced or removed over time. We work closely with our providers to ensure reserve terms are laid out clearly, and if a merchant has a chance to reduce or remove a reserve in the future, we work hard to make that happen.
One of the ways we help a merchant get its rolling reserve account reduced or removed is providing recommendations to help reduce fraud and/or chargebacks. Sometimes, fairly simple steps, such as clearly stating the return policy on your website or verifying addresses before processing credit card transactions, lead to substantial improvements that, over time, demonstrate to the acquiring bank that your business is on more solid financial footing and poses less of a risk.
Decisions whether or not to establish a reserve account are part of the underwriting process and are not negotiable when a merchant account is offered. This is one reason why we work with multiple processors for our clients — processors have different risk tolerances. For high risk businesses in particular, obtaining more than one offer makes good business sense before locking into an account where the terms may not be as favorable as possible.
While a rolling reserve does indeed adversely affect cashflow and capital available for reinvestment in a business, the advantages of being able to process credit card transactions typically outweigh the negatives of the RR. If you would like help in developing a strategy to reduce or remove your RR, please contact us now. We have a great deal of experience in this area.