What is a Reserve?
And why would I be asked to agree to one?
A reserve is a risk-mitigation tool that helps processors and merchants ensure that there funds available to cover unforeseen losses. When accepting credit cards, there are certain risk factors that increase a merchant’s probability to incur disputes/chargebacks, fraud, or business closure. For these scenarios, it’s helpful for the Merchant Service Provider to have “funds set to the side” to cover losses that were unanticipated. For example:
- Receiving dozens of chargebacks related to fraud, all at once
- Losing licensing/certification to sell your product/service, and having customers dispute sales
- Unforeseen business conditions could cause your business to close, leaving you with outstanding credit card obligations (you’ve taken payments for orders not fulfilled)
- Fulfilling fraudulent orders at a large cost to your business, that you later won’t get paid for
In any of the above circumstances, if your business can’t absorb the losses, your Merchant Service Provider has to. In order to mitigate that risk, a Reserve Account is commonly established. A specific percentage of your ongoing sales (for example, 5%) will be automatically held to the side, and placed into a non-interest bearing escrow account. These funds ultimately belong to you, and would be returned to you if you closed your account. But the funds will accrue until a specified cap amount (typically 1-3 month’s worth of processing volume) and will remain there, available for risk mitigation if necessary. So, if you had a $20,000 monthly volume account with a 5% reserve, we’d hold $1,000/month until $20,000 accrued. You’d be paid the other $19,000/month like normal, and once the $20,000/month reserve cap was reached, no more reserve funds would be taken.
Reserve accounts are regularly reviewed, and with good processing history and a lack of issues, reserves can often be reduced/removed after a 6-12 month period. 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 up an account. This wouldn’t be a common request, reserves are only used to mitigate risk in specific circumstances – typically surrounding new businesses, high-ticket payments, or specific industries with high historical chargeback ratios.