Reserves As Part of Your Underwriting: What You Might Experience and Why

Did you know that just because you have a business and a bank account setup, it doesn’t mean you will automatically be approved for a merchant account with a card processor?

In fact, every bank and processor is different in their appetite for the types of accounts they will approve.

Many people don’t realize that when a business is approved for a merchant account, there is a great deal of risk assumed by the card processor and acquiring bank, especially if your business accrues losses you can’t remedy with your own financial resources.

In an effort to protect themselves from these types of losses, card processors sometimes require a reserve on merchant accounts. Similar to an escrow account, a reserve allows the processing bank to establish a cash reserve in relation to a business’ monthly processing volume. These funds are used to cover everything from losses from chargebacks to uncollected fees and fines.

Because customers often have six months to file a chargeback, the reality for the processing provider is that each cleared transaction is essentially “a loan to the business” for the timeframe during which the transaction is at risk of being charged back. Therefore, the reserve acts as a cushion for the processing company. This can be extremely beneficial in situations where a “loan” ends up unpaid. At the end of the day, the funds in the reserve belong to the business, but are inaccessible for the period of time in which they are held.

There are several types of reserves used by processors today:

  • Rolling reserve. Similar to a security deposit, (without having to pay up front), this is one of the most commonly used reserve models for high risk merchant accounts. For every deposit made to a merchant’s account resulting from a cleared transaction, a fixed percentage of that deposit is held for six months. Funds that were held back in the first month are then released to the business account in the seventh month (and so on). Most high risk merchants have some type of rolling reserve placed on their account, especially newer accounts without processing history.
  • Capped reserve. This type of reserve holds back a percentage of each deposit resulting from a cleared transaction until a fixed “goal” amount is reached. After this goal is reached, that money remains in reserve but nothing additional is held from future transactions.
  • Upfront reserve. Also based on a percentage of a merchant’s expected monthly volume, this reserve is required upfront, at the very start of the merchant’s relationship with the card processor. It can be collected in numerous ways: either 100 percent of transaction deposits are held in reserve until a target goal is met; the business will be asked to wire the required amount from a checking account; or, a letter of credit is necessary from the merchant’s own bank.

Because high risk merchants are evaluated on an individual basis, and different processing banks have different criteria for setting processing rates, it is best to speak with a BillingTree team member to discuss the best possible solution for your business processing needs.