What Is a Rolling Reserve Merchant Account

When browsing for a suitable payment processor to partner with, you’ve likely encountered rolling reserves as a service provided by some.

Before creating a rolling reserve merchant account, it’s essential to understand what this term means, how this reserve works, and what you can expect as a business.

In the following sections, we cover these points and more.

What is a Rolling Reserve?

A rolling reserve is a policy designed to protect merchant account providers or payment processors against chargebacks. Under a rolling reserve, a set percentage of a merchant’s gross sales is withheld to compensate for any chargeback costs or refunds in the future.

In that sense, a rolling reserve merchant account is a specifically designed merchant account that brings down all financial risks for payment processors and acquiring banks. 

It can be described as a reserve fund that holds back a portion of a merchant’s revenue and releases it if it hasn’t been used. Like an insurance policy, this rolling reserve is a cushion that shields merchant account providers against liabilities. 

Let’s look at an example.

Imagine that a merchant processes credit card transactions. In this case, the merchant account provider keeps part of the revenue generated from these transactions and stores it as a rolling reserve. After a specific duration, the percentage of the income is gradually released and given back to the merchant.

This rolling cycle gives rise to the term rolling reserve.

Although creating a rolling reserve account is not always mandatory, it’s often shared in high-risk markets and industries, like gambling, adult entertainment, travel, and more. Due to the likelihood of refunds or chargebacks, merchant account providers often oblige merchants to create a rolling reserve merchant account to accept credit card payments.

How Does a Rolling Reserve Work?

Now that we’ve covered the foundations, it’s time to explore how rolling reserve merchant accounts work.

Although this process is nothing complicated, it’s fundamental to understand it in detail to know how your funds are stored and managed as a merchant.

Once you create a rolling reserve agreement with a merchant account provider, the provider or payment processor will inform you of the rolling reserve percentage. This percentage varies based on the type of industry you operate in or the provider you’ve selected.

However, rolling reserve percentages typically range from 5% to 15% of daily or monthly credit card transactions. 

Remember, the acquiring bank will withhold this percentage from your transactions and store it in a non-interest-bearing account. This means that the merchant cannot access this money at this stage. 

On the contrary, the provider will keep it for a specific period, typically 30 to 180 days. 

Why?

Because, in most cases, customers have around 120 days to file a chargeback from the day of purchase. 

After this period has expired, the reserve funds are transferred back to the merchant’s bank account. Suppose any portion of the stored money was used to cover chargeback costs, refunds, or other fees. In that case, it will be subtracted from the total amount paid back. 

It’s important to note that the deduction to repay chargebacks is made from the merchant’s bank account, not the reserve account. As long as the merchant’s account is in good standing, the account provider does not use the reserve to pay chargebacks.

The reserve account is used only if the merchant account is closed, and the bank must cover chargebacks.

Rolling reserve represents a cyclical process. While new funds enter the reserve, others are being released.

For instance, imagine you’re a merchant who processes ￡500,000 a month. If you’re rolling reserve percentage is 10%, ￡50,000 will be held back by the merchant account provider for a specific period, like 90 days or 180 days. 

Once the agreed-upon period is over, you’ll receive your ￡50,000. As you process transactions, new funds are stored in the reserve. 

This process enables merchant services providers to enjoy peace of mind, knowing that they operate with a safety net that allows them to cover unexpected expenses due to certain merchant activities. In the realm of merchant services, rolling reserves are a must.

Factors Influencing Rolling Reserve Amounts

Above, we mentioned different terms and conditions regarding rolling reserves. You can agree upon different percentage rates, durations, and other factors.

But what exactly are the factors influencing rolling reserve amounts?

These include your business type and risk level, financial history, monthly turnover, and different policies of the acquiring bank. More on that in the below lines.

Business Type

One of the most important factors influencing the rolling reserve amounts is the merchant’s business type and the risks associated with the industry.

Naturally, higher reserve percentages and longer holding durations are associated with high-risk industries, as the expenses are usually the most substantial. 

Where chargebacks and disputes are expected, merchant service providers are exposed to more vulnerabilities.

Financial History

In addition, when setting the rolling reserve terms, merchant account providers always assess the merchant’s financial history, specifically their track record with chargebacks and refunds.

Those with unstable financial positions and a history of chargebacks are likely to be required to set aside higher sums for coverage, leading to a hefty reserve requirement. Meanwhile, a business with stable financial health may enjoy more preferable reserve requirements.

Start-ups and new businesses are usually obliged to maintain higher reserves. This is because they still need to have a proven history of financial stability, making them higher-risk partners for merchant services providers. 

Monthly Turnover

Another factor that’s assessed is the merchant’s monthly turnover or sales volume.

While higher transaction volumes are usually associated with higher reserve amounts, they may also be a reason for merchants to be able to secure a quicker release of their stored funds after the account reaches an agreed threshold.

The Policies of The Acquiring Bank

Your choice of acquiring a bank and merchant service provider can make all the difference.

Each provider has its policies and rules regarding rolling reserves. Some prefer to attract more merchants with more flexibility, while others strictly apply stringent measures, especially for high-risk merchants.

Benefits and Drawbacks

Rolling reserves can offer many advantages to merchants and payment processors. However, there are also a few drawbacks to consider.

One key advantage of this process is that it protects merchant account providers from unexpected costs, allowing them to cover expenses efficiently without disrupting business. The reserve funds also guarantee merchants won’t have to cover unaffordable costs, potentially creating shortfalls.

This type of reserve also fosters financial discipline. Acting as a forced savings account ensures that merchants know that part of their funds are being withheld. This can be highly motivating, lowering chargeback rates to a minimum and ultimately encouraging better business processes. 

A rolling reserve may be the only way for a business to gain access to payment processing services after due diligence and accept card payments. 

However, not everything about rolling reserves is positive.

A rolling reserve account can significantly impact a merchant’s cash flow as the business won’t have access to its revenue. 

Moreover, merchants don’t earn interest on the money being held back from them. This creates missed opportunities in the long term, as their funds may have been used more effectively during the rolling reserve. 

When signing up for a rolling reserve merchant account, carefully read the fine print to fully understand what you’re signing up for. Check the duration of your money’s return and ensure this won’t cause any financial challenges for your business.

Fixed Reserve vs Rolling Reserve

It’s important to understand that there are two types of reserves: fixed and rolling. 

The fixed reserve (also called static reserves, capped reserves, or upfront reserves) is an arrangement in which the money that will be held back is put into the reserve upfront and stored for a set period. This type of reserve is called “fixed” because it remains constant for the entire duration of the agreement. 

Unlike the rolling reserve, the fixed reserve’s terms and amounts don’t alter depending on the merchant’s monthly transactions.

On the other hand, a rolling reserve is dynamic and updated according to the merchant’s processing activities. 

Does one dominate over the other?

No, the right choice ultimately depends on what the merchant is looking for and what the payment processor or merchant account provider can offer. 

Overall, fixed reserves provide higher levels of predictability but can be associated with many more restrictions. Meanwhile, a rolling reserve is flexible but demanding, significantly impacting your cash flow.

Does Your Business Need a Rolling Reserve Merchant Account?

Whether your business needs a rolling reserve merchant account is a question that requires in-depth consideration. 

The best way to find out is to analyse your industry, your business’s risk profile, and your financial situation now and in the past closely. 

In most cases, you’ll need a rolling reserve merchant account if:

• You have poor credit card processing history – this may be a result of the fact that you’ve recently opened your business, meaning that there isn’t enough information on your processes and financial losses that can be used to determine your risk level.
• You deal with a lot of pre-orders. Suppose your business model revolves around pre-orders on products that need to be prepared for delivery. In that case, chances are that you’ll receive a lot of refunds and chargebacks. This positions you in a high-risk industry, meaning that you’ll not only need a rolling reserve merchant account, but your reserve requirement may be higher than on a standard.
• You need a strong credit history. If you need better credit, expect to be required to open a rolling reserve merchant account with your payment processors.

In addition, if you have complex financial obligations or are seeking risk management, a rolling reserve merchant account could be the right option.

Conclusion

Rolling reserve merchant accounts are designed to create a safety net for payment processors and merchant account providers. At the same time, they offer benefits for merchants, reducing the chances of unexpected situations.

When creating a rolling reserve merchant account, make sure you’ve carefully read all of the terms and conditions. Enter this agreement well-informed to avoid cash flow challenges, legal conflicts, or business disruptions.

Frequently Asked Questions

How long do merchant account providers hold the reserve for?

This depends on the payment processor or merchant account provider you’ve selected, your industry, level of risk, and other factors. In most cases, reserves are held for between 30 and 180 days.

How often are the terms and conditions of rolling reserves reviewed?

Your rolling reserve merchant account’s terms and conditions can change over time based on transaction volumes, financial stability, refunds and chargebacks, and more. Ensure you communicate this with your provider and understand more about the review process, frequency, and potential changes.

Is it safe to have a rolling reserve merchant account?

Your funds will be safe with the merchant account provider, given that you’ve partnered with a reliable, proven, and financially stable payment processor.