Rolling Reserve Merchant Account: Especially for startup merchants and high-risk merchants, the bank takes all the possible caution to avoid any loss in their business. Due to which they have created a robust network of rules that need to be followed at all times so that the economic and financial aspect of the business never sees any downfall. Rolling reserves are part of the acquiring bank’s risk management strategy, as it ensures the availability of sufficient liquidity in the event of high chargeback ratios. Simply, the rolling reserve is a buffer for chargebacks.
Rolling Reserve is a technique used by banks to create a buffer in case of bankruptcies, fraud, chargebacks 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 past, acquiring banks were more strict in their approach, favoring fixed reserves deposits or bank guarantees. Since this was next to impossible for businesses to find that capital funds, 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.
For startups and high-risk merchants, banks take all possible caution in order to avoid any loss in their business. This is why they need to create a comprehensive network of rules to be followed all the time so that the financial and economic aspects of the business will never see any downfall.
An example, an acquiring bank holds 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 the 61st day, funds that were held back on the first day will be released. On 62th day, funds held back from the second day would be released, and so on.
Many factors can affect an acquirer’s decision in determining a Rolling Reserve. Such as business model, length of time in business, turnover, profitability, delivery period and any customer guarantees.
These days, a 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.
Rolling Reserve: A Useful Risk Management Strategy
Rolling reserve is a part of a bank’s risk management strategy. It ensures the availability of enough liquidity in the event of a high chargeback ratio. In simpler terms, a rolling reserve is just a buffer for chargebacks, fraud, bankruptcies and other incidents where the acquirer can lose money.
This buffer is created by withholding a percentage of a merchant’s revenue for an agreed period of time. After the buffer time, it should be released to the merchant.
Some time ago, acquiring banks were stricter in their approach, preferring predetermined reserves deposits or guarantees. Because it is sometimes impossible for businesses to acquire this capital fund, applications were usually rejected by the bank. But, with rolling reserve, it provides businesses a way to build up their reserve instead of providing a one-time fund.
Nowadays, a rolling reserve is usually used in order to provide security for banks to facilitate MasterCard and VISA processing services. It is usually granted to high-risk merchants since these businesses themselves are, well, high risk, so the banks need to find a way to lower the risk of them losing money.
How Rolling Reserve Works?
As mentioned before, rolling reserves act as shield against chargebacks. The more risk that a business possesses, for instance, subscription business or longer delivery interval, then a higher rolling reserve is calculated by the bank.
This makes sure that the merchant has enough liquidity in situations of high amounts of chargebacks.
A bank holds 20 percent of a merchant’s revenue for 60 days. So, for the first 60 days of business, the merchant will have an 80 percent payout with the 20 percent being held back by the bank.
And on the 61st day, the funds that were held back on the first day of business will be released. Then on 62nd day, the fund held back from the 2nd day of business would also be released, and so on.
Understanding a Rolling Reserve Merchant Account
Rolling reserve is set percentage (usually 5 – 10 percent) of a merchant’s transaction amount reserved by the acquiring bank that can be used in situations of excessive chargebacks. This can happen for only a short period of time (usually 6 – 12 months) just until the business has some stability.
After a specific period of time, the bank will release the amount to the merchant on scheduled dates.
A rolling reserve merchant account is mainly for high-risk businesses. The idea of using rolling reserve is to prevent any loss of revenue in case of fraud and excessive chargebacks in the business. Usually, a bank imposes about 7 percent rolling reserve on your account for at least 180 days in order to prevent the risk of losing money.
The payment processor will hold this 7 percent of your sales transactions and that you will not have any access to this money until your rolling reserve merchant account is completely closed or for the agreed time period.
What Makes a High-Risk Business?
As mentioned before, rolling reserves are usually required for high-risk businesses. But what exactly is a high-risk business?
- Merchant with Poor Personal Credit
These are merchants with a long history of bad credits in the previous years or even filed for bankruptcy. Banks will see these businesses as high risk. They are usually denied a merchant account and require to get a rolling reserve merchant account for their business.
- Excessive Amount of Chargebacks
Most credit card service providers have a general 1 – 2 percent criteria of chargeback ratio. Anything more than 2 percent of chargeback is considered excessive chargeback. Exceeding this limit every now and then makes your business high risk.
Some business which is categorized as high-risk businesses include:
- Telemarketing or VoIP
- Dating services
- Forex Trading or Cryptocurrency
- Computer hardware and software business
- Online drug stores or pharmacy
- Airline tickets or travel agencies
- Adult products and services
- Magazine subscriptions
If you’re a merchant of such business or in a similar industry, then you’ll have to take a rolling reserve merchant account.
Is It Applicable To All Merchant Accounts?
Every processor or acquiring bank has its own policy and require various businesses to have a merchant account reserve. The most crucial factor that affects their decision is the risk of the account poses to the bank.
As a rule of thumb, all high risks businesses should have a reserve as a condition of their agreement.
Other factors that affect a bank’s decision in determining a rolling reserve includes the business model, profitability, turnover, amount of time in the business, customer guarantees and delivery periods.
The Effect of Rolling Reserve to Merchants
Rolling reserves generally limit the merchant’s fund particularly the profit. For startups, it can be quite difficult to generate revenue without any access to the profit from the previous investment. Here are some ways a rolling reserve can affect a merchant’s business:
With the bank holding back a set amount of money from the merchant, then it can be hard for the merchant to expand and grow his business. This results in slower business growth during the first days of the business.
- Cash Flow
As mentioned before, rolling reserve controls the cash flow of the business. Even though a 5 – 10 percent seems like a small amount, it significantly affects the net profitability of the business that can be used to expand or grow. Thus, it is strongly recommended that any merchant should determine any cash flow issues before agreeing for a rolling reserve merchant account.
The modern market has intense competition. And it can be quite difficult to contend with other businesses with a small budget. This means a rolling reserve can create some challenges for you to compete with rival businesses and acquire new customers.
See it as a Great Opportunity: The Benefits of Rolling Reserve
While rolling reserve can be problematic for some, it can also provide great benefits.
- Chargeback prevention
As mentioned above, rolling reserves act as a shield against refunds and chargebacks. It pushes merchants in the high-risk industries to maintain a cautious eye against chargebacks and use this strategy to prevent problems.
- A New start
Merchants with bad financial history or even places on the MATCH list will likely be required to have a rolling reserve when starting their business. However, this is a chance for the merchant to improve his finances and credit history.
In 6 months’ time or when the rolling reserve is done, the bank will release the merchant’s withheld funds incrementally. This signifies reciprocal trust and stability in the business.
Is a rolling reserve applicable to all merchant accounts?
A rolling reserve may be applied to a merchant account depending on the business model and the average delivery time of the goods and/or services. Thus, additional information is required after registration in order to draw conclusions.
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.