Rolling Reserve is a method used by banks to create a buffer in case of bankruptcies, fraud and other incidents where the acquirer may lose money. The buffer is made by withholding a percentage of revenue for an agreed period of time. After this buffer time, it will be released to the merchant.
In the earlier times acquiring banks were more restrictive in their approach, favoring fixed reserves deposits or bank guarantees. Since it is mostly hard for businesses to find this capital, applications were often rejected by the acquirer banks. The rolling reserve is a way to allow businesses to build up their reserve rather than providing the required funds up front.
An example could be that the acquirer bank withholds 20% of revenue over 60 days. This means during the first 60 days of business the Merchant will receive a payout of 80%, with 20% being held back. Therefore on day 61 funds that were held back on the first day will be released. On day 62 funds held back from the second day is released, and so on.
There are several factors that can affect an acquirer’s decision in calculating a Rolling Reserve. Such as business model, length of time in business, turnover, profitability, delivery period and any customer guarantees.
Nowadays Rolling Reserve is only used to provide security for acquiring banks to facilitate VISA and MasterCard processing services. Rolling reserves are typically imposed upon high risk merchants because these businesses themselves are high risk businesses, so the banks have to find some way to lower the risk of losing money.
You can check below are a few categories where a business can find itself in the high risk category if they have one or all of the following:
- If there is any past processing history with excessive chargebacks
- If there is any risk in business models such as subscription services, adult industries, tobacco and vape, travel, and more
- If there are large ticket prices
- If the business is of the high processing volume
- If the owner has a bad credit history
So if your business lies in any one of the category or in all of them it is considered to be high risk business.
Let us take a scenario – You have a subscription box business selling vape E-juice and hardware. Every month your customers get great vape and e-cigarette related products delivered to their doorsteps. Your customers are satisfied with the convenience of this service and you are making a profit out of it. Your merchant bank is shaking in their boots because they know that having a subscription service is a great way to earn more money but at the same time, it results in an excessive amount of chargebacks.
Bank imposes a 7% rolling reserve on your account for 18 months to avoid the risk of losing money because they know that there will be chargeback. The payment processor will hold 7% of your sales transactions and you will not have access to this money until your account is completely closed.
How is the business affected by a rolling reserve?
Well, a rolling reserve can almost always hurt your access to cash flow, making it difficult for you to compete in your industry. It may also mean that your net profit and available funds cannot be used for marketing of added value purchases. This kind of scenario can seriously hold your company’s growth. So keep in mind that if you make the decision to go into a high risk industry though profits are high at the same time the risk is also high, be prepared for high risk costs that may appear during the journey, and a rolling reserve is definitely one of them.
If you’re not sure whether or not your company has been classified as a high risk business, be sure to read more here for a complete list of businesses that are considered as the high risk business and to know more about – What is a High-Risk Merchant Account?
To find out about iPayTotal’s merchant services for a credit card processing merchant account, speak with a live representative directly at +44 800 776 5988 or get in touch with us through our website.