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What are merchant account reserves?

In the merchant processing industry, a reserve account is a bank account that a merchant’s payment processor holds. The purpose of the reserve account is to protect the payment processor from losses in the event of fraud or chargebacks. Typically, we see this requirement being mandated for “risky” or “poor credit” types of businesses. Reserve accounts are a common practice in the merchant processing industry. They are used to protect both the merchant and the payment processor from financial risk.

The amount of money held in the reserve account varies depending on the merchant’s risk level and processing volume. Merchants with a high risk of fraud or chargebacks will be required to hold more money in their reserve accounts. Reserve accounts are typically funded by the merchant through a deposit or a debit to their bank account. The merchant can access the funds in their reserve account at any time, but they will be required to maintain a minimum balance.

How do reserve accounts work?

When a merchant processes a transaction, the funds are typically deposited into the merchant’s reserve account first. The payment processor then holds the funds in the reserve account for a period of time, typically 30 to 60 days. However, the agreed balance needs to remain intact throughout the relationship. During this time, the payment processor monitors the transaction for any signs of fraud or chargebacks. If no fraud or chargebacks are detected, the payment processor will release the funds to the merchant. This is not an easy process.

If fraud or chargebacks are detected, the payment processor will keep the funds in the reserve account to cover the losses. The merchant will be responsible for repaying any losses that are incurred.

Types of Merchant Account Reserves

Processors use multiple different types of reserve accounts, each useful for different reasons. The four most common categories of reserve accounts are:

Rolling Reserves: A percentage of a merchant’s daily sales is withheld and gradually released after a set period, typically 6 to 12 months. This type of reserve helps mitigate chargeback risks while ensuring a steady cash flow over time.
Capped (Accrual) Reserves: Funds are withheld from transactions until a predetermined reserve balance is met. Once the cap is reached, no additional funds are withheld unless the balance drops due to chargebacks or refunds.
Up-Front Reserves: A lump sum is required at the start of a merchant processing agreement, either through an initial deposit or withheld from early transactions. This reserve provides immediate risk protection for the processor before releasing full access to funds.
Special Reserves: Some processors have their own unique reserve account types with custom rules, features, and arrangements that go beyond the pre-determined types above. These special reserve accounts can be tailor-made to the merchant or their industry.

What are the benefits of a reserve account?

Reserve accounts offer a number of benefits to merchants, including:

Reduced risk of fraud and chargebacks: By holding funds in a reserve account, the payment processor can reduce the risk of losses from fraud and chargebacks.
Improved cash flow: Merchants can access the funds in their reserve account at any time, which can help to improve their cash flow.
Reduced processing fees: Some payment processors offer reduced processing fees to merchants who maintain a reserve account.

What are the drawbacks of a reserve account?

There are also some drawbacks to using a reserve account. These include:

Reduced liquidity: Merchants will have less access to their funds while held in a reserve account.
Additional fees: Some payment processors charge fees for maintaining a reserve account.
Complexity: Reserve accounts can be complex to set up, manage, and close after the “risky season” is approved from the credit and risk accounts.

Should I use a merchant reserve account?

Whether or not to use a reserve account is a decision that each merchant must make for themselves, and at times, there may not be an option if you need to accept credit cards. Some businesses are required to use a reserve account if it’s deemed necessary. There are a number of factors to consider, including the merchant’s risk level, the size of their business, and their cash flow needs. If you are considering using a reserve account, it is important to talk to your payment processor and/or merchant services provider about the pros and cons of this option.

Merchant’s Risk Level

The risk level of both the merchant and the merchant’s industry plays a key role in determining the necessity of a reserve account. Most of the time, increased risk levels are derived from higher chargeback rates. Merchants in high-risk sectors like THC/CBD, travel, tobacco, or collections are among the most vulnerable industries, although there are many more out there.

Size of the Business

Merchants running small businesses with inconsistent revenue and cash flows are more likely to benefit from reserve accounts (and are usually subjected to more stringent reserve requirements). On the other hand, larger businesses with steady cash flows and a long history of payments with low chargeback rates have less of a need for reserve accounts.

Cash Flow Needs

Reserve accounts can create cash flow challenges for merchants who can’t afford to have their funds withheld for a period of time. While using a reserve account, merchants could go up to 90 days in extreme cases without seeing their money, creating liquidity challenges for businesses with tight cash flows.

Talk with our merchant expert

Book a time to chat with Don, our merchant expert, and learn how Evolve Payment can remove all the guesswork from reserve account setup and management.

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Evolve Payment Brings Clarity to Account Reserves for Merchants

Reserve accounts are a common practice in the merchant processing industry. They offer a number of benefits to merchants and processors, but they also have major drawbacks. Whether or not to use a reserve account is a decision each merchant must make for themselves.
The team at Evolve Payment works with several different processing partners, as well as multiple credit and risk departments, to find a solution for our customers to mitigate this underwriting requirement. If you currently need a reserve account, please contact our team and find a better solution for your business needs.