The Complete Guide to Rolling Reserves (almost)


April 24, 2020

 

 

 

Rolling Reserve Accounts can be confusing for new merchants venturing into the world of credit card processing, but they are commonplace for most businesses that fall into high-risk industry categories. It is important to understand that a Rolling Reserve is there to protect both the Payment Service Provider (PSP) and your business. We examine why most high-risk credit card processors require a rolling reserve account and how it protects you.

The complete guide to rolling reserves (almost)

What is a Rolling Reserve?

When you sign a Merchant Service Agreement (MSA) with a credit card processor to begin accepting Visa or Mastercard payments, you are likely to see a clause about a rolling reserve. The rolling reserve is usually an amount of between 5 to 10 percent of a merchant’s net sales. This sum is retained in a non-interest-bearing account for a fixed period of time, usually 180 days. The importance of the 180 days is because a customer has 180 days from the time, they receive their goods or services to enact a chargeback with their credit card issuer.

Rolling reserve accounts are different from reserve accounts which are usually set-up with a pre-agreed amount to reflect the risk level of the business. Rolling reserves, on the other hand, are taken up-front for a pre-determined amount of time and consistently roll the small percentage taken from the merchant’s net sales.

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Why do credit card processors require Rolling Reserves?

Credit card processors typically ask for rolling reserves when working with high-risk merchants in industries such as gaming, adult entertainment, sports betting, nutraceuticals and MLMs. The reserves are there to mitigate the risk and protect the processor from any potential losses due to chargebacks.

What you may not know is that your Merchant Account Provider effectively issues you with  ‘a line of credit’ when they release funds from your credit card transactions because they are paying their merchants prior to receiving the funds from the credit card brands.  However, a customer might dispute a transaction and raise a chargeback anytime within the 180 days chargeback timeframe. It is therefore the Merchant Account Provider who issues the refund immediately to the customer while the chargeback is being investigated and it is the Merchant Account Provider who is responsible for that chargeback after the merchant has been paid for the transaction. Therefore, a rolling reserve is required for higher-risk merchants who are just starting out or expected to incur higher chargebacks than your traditional low risk merchant account.

How do Rolling Reserves protect the merchant?  

Donald Kadson, of T1 Payments, specialists in credit card processing for high-risk merchants, explains: “Businesses with increased levels of risk will inevitably attract different terms from lower-risk merchants such as longer-term contracts, a different fee structure and processing rates. These terms help balance the risk associated with either stringent regulations, increased potential for fraud or higher volumes of chargebacks. There are many high-risk businesses that would not be approved for a card payment account, but we believe they should all have the choice to accept card payments as this is critical to helping them grow.”

High-Risk Merchant Processing can be complicated, our experts are on hand to assist you with every aspect regarding your credit card processing needs. Contact us today or Apply now! We look forward to hearing from you.