What is a Merchant Account Reserve?

Jan 14, 2021

Depending on your history and the nature of your business, your payment processor might require you to have a merchant account reserve. This reserve protects your processor in the event that you’re unable to cover processing fees and other bills. While some merchants don’t require this reserve on their accounts, many do. Below, we discuss how this reserve works and what type of merchants typically require it.

How is a Merchant Account Reserve Calculated?

The amount of reserve a merchant requires is calculated on a case-by-case basis. The payment processor will take into account all of the risks associated with providing processing services for the merchant in question and use that information to determine how much reserve is needed on the account.

Merchants that are susceptible to higher fees will require a higher reserve. For example, one that has an extremely high processing volume or processes particularly high-ticket items will usually require a larger reserve to cover the higher fees that are associated with their processing habits.

What Types of Merchants Typically Require a Reserve?

Most commonly, the merchants that are required to provide a reserve are those that run high-risk businesses. That can include:

  • Those operating in high-risk industries
  • Merchants with poor or no processing history or a low personal credit score
  • Those that offer goods or services on a free-trial model or that sell primarily online or over the phone
  • International merchants
  • Merchants that process high ticket items or have a high processing volume
  • Merchants with a history of high chargeback ratios

Types of Reserves

Depending on the merchant’s history and credit, the payment processor may offer up several options for setting up the account reserve. There are three types of reserve: up-front, capped, and rolling.

Up-front reserve

An up-front reserve is set up prior to the merchant obtaining processing capabilities. When opening the account, the merchant will be required to pay the full amount of the reserve before the company will set up their account. In some cases, this might require the merchant to obtain a business loan or line of credit, which is completely acceptable. If the merchant isn’t able to provide these funds with credit or by paying out-of-pocket, some payment processors will allow the merchant to set up an agreement in which the processor retains all sales proceeds until the reserve amount has been met.

Capped and Rolling Reserves

Capped and rolling reserves are generally reserved for merchants with better processing and credit histories. These accounts are set up without up-front funding and the processor slowly deducts a portion of each transaction to hold in the reserve account. These deductions typically range from 5% to 20%.

While a capped reserve remains with the processing bank for as long as the merchant’s account is open, a rolling reserve is temporary and after a predetermined amount of time, funds begin releasing back to the merchant.

What Do Processing Banks Do With Reserve Funds?

Funds in merchant account reserves are held in trust by the processing bank, which is authorized to use those funds to cover merchant fees that are in arrears. In the event the merchant is unable to pay their processing fees or other bills due to the bank, the funds can be withdrawn and deducted from the reserve. In some cases, the merchant may be required to return those funds to the reserve when they’re able to.

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