Merchant Account Reserve

A Reserve is a portion of the monthly revenue from a merchant’s card processing transactions that credit card processing companies may request to hold in an escrow account as an insurance against possible loss from chargebacks and other sources. Used mainly with high-risk merchant accounts, upon satisfactory completion of a predetermined period, reserves are returned to the merchants. In the case of a rolling reserve, a reserve is held every month for a certain period (usually six months). On the following month the first month’s reserve is released to the merchant, and then the second month’s reserve and so on until there is no longer a reserve.

Certain industries tend to be riskier than others and generate higher levels of chargebacks. All merchants that operate in a non-face-to-face environment fall into this category. Direct marketing and eCommerce are two examples. Yet, only a small percentage of these businesses will be asked for a reserve – usually businesses that process large volumes and have a large average ticket. New businesses that operate in the virtual realm are also prime candidates for a reserve and are carefully examined by their processors. Merchants that are at the very high end of the risk scale and cannot get a merchant account with a US processor are certain to be asked for a reserve if they apply with an offshore provider, in addition to the very high processing rates that they will be charged.

A reserve may also be requested if a merchant has a bad credit history, in addition to a personal guarantee. In cases where a reserve is required, the minimum reserve balance for small business merchant accounts is set at about 20% of the anticipated credit card payment processing volume. New merchants are usually allowed to build up their reserve by sending in transactions which are not withdrawn until the minimum reserve balance is achieved; after that, the merchant is allowed to withdraw the excess funds for transfer to their checking account.

Every credit card merchant processor has a different underwriting policy, so it is a good idea that you request several credit card processing proposals before making a decision. It may just turn out that one of them does not have a reserve requirement. Yet, this is just one of the factors that you should consider when selecting a provider. Processing costs, customer service, transaction reporting capabilities, chargeback and risk management tools, fraud prevention services are all very important and should be carefully evaluated.