What is a Reserve?

Reserves act as a safeguard for the payment processor to cover potential chargebacks, refunds, fraud, or other financial obligations that may arise from credit card transactions. The purpose of reserves is to mitigate the financial risk of processing credit card payments.

When accepting credit cards, certain risk factors can increase the likelihood of disputes, chargebacks, fraud, or business closure. In these situations, it's beneficial for the Merchant Service Provider to have "funds set aside" to cover unanticipated losses. For instance:

• Receiving numerous fraud-related chargebacks all at once.
• Losing the certification or licensing to sell your product/service; leading to customer disputes.
• Unforeseen business conditions causing your business to shut down, leaving outstanding credit card obligations (such as payments received for orders not yet fulfilled).
• Fulfilling fraudulent orders at a significant cost to your business, for which you won't be compensated later.

In any of these cases, if your business cannot absorb the losses, your Merchant Service Provider would need to. To mitigate this risk, a Reserve Account is often established. 

Reserve accounts are regularly reviewed, and with a good processing history and lack of issues, reserves can often be reduced or eliminated after 6-12 months. 

All reserves are fully discussed with merchants before being implemented, and you'll need to sign a reserve agreement letter to authorize a reserve when opening an account. This is not a common request; reserves mitigate risks in specific circumstances, typically involving new businesses, high-value transactions, or industries with high historical chargeback ratios.

Payment processors can implement different types of reserves

1. Rolling Reserves: This type of reserve involves withholding a certain percentage of the merchant’s daily credit card/eCheck/ACH sales over a specified period. For example, a rolling reserve of 10% means that 10% of each day’s credit card/eCheck sales will be held for a predetermined period, typically 180 days. After the reserve period elapses, the funds are released to the merchant (every month). This cycle continues for the lifetime of the account. Month 1 reserves are paid in month 7, month 2 reserves are paid in month 8, etc.
2. Upfront Reserves: In this case, a specific amount of funds must be deposited upfront before the merchant can begin processing credit card transactions. The upfront reserve is usually a fixed amount determined based on the merchant’s risk profile, industry, or projected sales volume.
3. Capped Reserves: With capped reserves, there is a maximum limit set on the total reserve amount that the payment processor can hold. Additional funds are no longer withheld once the reserve reaches the predetermined cap.

A Capped Reserve Example
A certain percentage of your ongoing sales (for instance, 5%) will be set aside and placed into a non-interest-bearing escrow account. These funds are ultimately yours and will be returned if you close your account. However, the funds will accumulate until reaching a specified cap amount (usually equivalent to 1-3 months of processing volume) and will remain there to mitigate risks if necessary. For example, with a $20,000 monthly volume account and a 5% reserve, $1,000 would be held each month until $20,000 is accrued. You would receive the other $19,000 per month as usual, and once the $20,000 reserve cap is met, no additional funds would be held.