As a business owner, accepting debit and credit cards is a necessity- but not all requirements for processing capabilities are the same. If you’ve been asked for a reserve and are confused, don’t worry! We’ll explain what a merchant reserve is, the most common types of reserves you’ll encounter, and who is required to have one so that you’re better prepared for what’s to come.
What is a Merchant Account Reserve?
A reserve is when a processing bank sets aside a predetermined amount of a merchant’s predicted monthly sales as a financial safeguard, for both the merchant and the processor, in case there is a financial crisis. Having this reserve ensures there will be funds available if or when it is needed. So basically, the reserve covers the financial risk of fraud or chargebacks- ultimately allowing payment processors to be comfortable giving the merchant the ability to accept credit and debit cards.
Types of Reserves
Depending on the specific business and choice of payments processor, the reserve request can be different. These are the typical categories of merchant reserve options you’ll see:
· Rolling reserve: this is the most common type, and often what people are referring to when talking about merchant reserves, but basically a portion of your monthly credit card sales (anywhere from 5-15%) is held in a side account for a period of time not accessible by the merchant. Then, once that given time period has been reached, funds from the reserve will begin to be released while new funds will continue to be added to keep “rolling” forward, maintaining a constant.
For example, if you’re on a 6-month rolling reserve you’ll have money diverted every month until the 6-month mark- at which point your funds from the first month will be given back to you while still simultaneously contributing the current month’s sales percentage to the reserve.
· Capped reserve (or accrual): here we still have money withheld monthly- but instead of a “rolling” reserve, there is a fixed amount (or cap). Once that cap has been reached, no further additional funding is withheld… but the reserve will still remain in place for the duration of the merchant account.
· Up-front reserve: just as it sounds, an up-front reserve is a lump sum required to be paid by a merchant in the beginning of opening an account in order to be able to obtain payment processing capabilities.
Who is Required to Have a Reserve?
Because a reserve is used as a safety net for possible financial exposure, most of the time it is high-risk merchants required to have a reserve. This means things like poor personal credit, selling highly regulated products, working in an industry known for elevated chargeback rates, having a high monthly processing volume, etc. are all going to need reserves attached.
And since merchant reserve requirements really come down to whatever each payment service provider’s policy is, working with the right processor is crucial for a successful business. To work with the best, contact Align eCommerce- we’re here to help you!
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