Merchant Account Reserve
What is a Merchant Account Reserve? When & Why Do I Need One?
If there is one element of credit card processing that is universally dreaded by all merchants, it may be the merchant account reserve.
All merchant accounts present a certain amount of risk to processors and banks. You may be required to carry an account-level reserve to offset this risk. In simple terms, this a predetermined share of your funds held up-front by your acquiring bank.
Having this money set aside helps protect the acquirer against unforeseen losses. It insulates them against liability in the event of business failure, or a sudden surge in fraud or chargebacks. It makes sense, from the bank’s perspective. But, if you’re already dealing with the increased costs of a “high-risk” account, a merchant reserve will only add to your pain.
Who is Required to Have a Merchant Account Reserve?
Each processor has its own qualifying criteria for a merchant account reserve. As we’ve seen, though, it’s mostly the risk level you present to the processor that determines if a reserve is necessary.
Generally, all high-risk merchants will be required to maintain a reserve; usually from the very beginning of the merchant processing agreement. If your risk factor escalates later, your processor can mandate a reserve at any time. Some characteristics that may result in a high-risk designation include:
* Having a poor personal credit history
* Processing card-not-present transactions
* Selling products or services considered risky or disreputable
* Selling in highly regulated product categories
* Having a high monthly processing volume or high average ticket amount
* Selling internationally, particularly in regions historically known for fraud
* Working in an industry with statistically high chargeback rates
* Using free-trial or subscription-based business models
You acquirer might also impose a temporary account reserve at the beginning of a processing agreement. This reserve could then be removed after a predetermined length of time. More commonly, though, the reserve is enforced for the duration of the agreement.
When Do I Get My Money Back?
Technically, the funds in the non-interest-bearing reserve belong to you, as long as there are no outstanding debts owed to the bank. When you actually get access to those funds depends on multiple factors. Each processor, for example, has different criteria and policies regarding account reserves, based on credit history, business model, and industry norms.
The required minimum balance of a merchant account reserve and the duration of the hold will be specified in your processing agreement. A temporary reserve might only be needed until the perceived risk has decreased (or passed). Other reserves might not be released until the merchant account is closed in good standing.
A terminated processing agreement that is enforced by the bank means the account is not in good standing. The revenue hold could be extended indefinitely. In these situations, funds will be held until all risk has passed. Since most chargeback time limits are 120 days, the bank will likely retain the merchant’s funds for at least 4 months.