olling 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 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.
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.