What is a merchant statemement?

A merchant statement is a document that merchants receive on a monthly basis detailing customer transactions and fees charged. 

The merchant account statement typically includes a deposit summary that has a breakdown of all the fees each party has paid. Details about any fee that the processor charged are also usually found detailed here. 

At first glance, it may appear like a merchant services statement is difficult to read, but understanding the pricing model and discount methods can help you determine the best processing rates for your business. 

What is important to know about your merchant statement?

Reviewing and understanding your merchant statement is crucial. It’s a great way to keep track of the growth of your business. 

The merchant statement not only details your monthly transactions but also includes your sales activity, including chargebacks to your merchant account. The details of the credit card processing fees that your business is being charged as also included. 

Let’s dive into greater detail on how these two key pieces of information are valuable in managing your business. 

How to read a merchant statement

Reviewing your merchant processing statement is a balance of looking at the big picture and the details. If you think you’re paying too much or believe you have questionable charges, you might need to check every fee on your statement to identify and confirm its source. 

On the other hand, you shouldn’t need to get that detailed with the individual fees and rates if you’re tracking the overall costs to ensure your amounts are reasonable and consistent each month. Now let’s get into the five steps of reading your credit card merchant statement. 

Step 1: Identify Important Information

The first thing to do when reading your merchant processing statement is review the document to identify the important information. These statements will look different from processor to processor so you’ll want to gain an understanding of the structure of your credit card merchant statement and see where the key information is found.

At the top right of your statement, you will find your processor’s name and contact information. Below that is your business’ name and information. On the left, you’ll see the processing month, your Merchant Identification Number (MID), the deposit amount number, and the dollar amount deducted in this billing statement.

Step 2: Determine which pricing model is used

The type of pricing model you have depends on your merchant processor. The most common include membership, flat-rate, interchange-plus, and tiered:

• Membership or subscription – This is a newer model where the markup is charged as a monthly subscription fee. There is also a separate small per-transaction fee which is favorable if you have larger transactions.
• Flat-rate – All transactions will cost the same, including the wholesale cost. This typically results in high transaction costs, particularly with debit transactions.
• Interchange-plus – The wholesale and markup fees are all laid out, which makes it the most straightforward pricing model to understand, though may take longer to review a merchant services statement. 
• Tiered – This pricing model categorized all your transactions into Qualified, Mid-qualified, and Non-Qualified. You receive the lowest rates on your qualified transaction and the highest for your non-qualified. 

Step 3: Establish the discount method

A processor will use either a daily or monthly discount to subtract fees from your account. The discount method that’s used affects the total fees your account is accessed and it is something that you determine. Monthly discounting tends to be a better fit for most businesses, but here is a description of both:

• Daily discount – the term “less discount paid” is typically how you can identify this method. The processor will charge its qualified rate before settlement and charge the transaction fees and other charges at the end of the month. The daily discount report will have the fees paid through the month and also those that are charged at the end of the month to calculate the total expenses.
• Monthly discount – Each fee is charged in one lump sum at the end of the month. This method is much easy to track on a statement. 

Step 4: Calculate your processing fees

Now you’re ready to identify your processing fees. You can take your total fees charged and subtract that amount from your interchange costs which are are your wholesale/base costs. What’s leftover is the markup that your credit card processor charges. 

Chargebacks

A chargeback occurs when a customer requests their credit card provider return a charge on their account. The customer may initiate a chargeback because the product or service was not purchased by them, was purchased without them knowing, was unhappy with the product/service, or never received it. 

Chargebacks may also occur because of a stolen credit card or identity theft. 8 out of 10 merchants have reported an increase in “friendly fraud” during the COVID-19 pandemic. Friendly fraud is a type of chargeback that occurs when the individual who reported the charge as unauthorized had knowledge, somehow benefited, or was complicit with the transaction. 

On the left is an example of how chargebacks are detailed on your merchant statement. You will see the last four digits of the card initiating the chargeback, along with the reason code, amount charged, chargeback date, and transaction date.

What is a Rolling Reserve?

Rolling reserves are a type of risk mitigation set forth by the processor to account for any losses they may incur from merchant processing activity.

Here’s how it works: a reserve account is set up where a percentage of each transaction is taken and put into a non-interest-bearing account (similar to a forced savings account). The merchant always has access to this account and can see the rolling reserve accrue in real-time.

Depending on the rolling reserve agreement, the reserve amount is either capped at a certain price point or is left on the account indefinitely.

How it all works!

Reserves are taken out at the transaction level and moved into a non-interest-bearing account maintained by the payment processor. 

You, as the merchant, will have access to see that account accrue whether that’s on your month-end processing statements, or inside a login/portal. A rolling reserve means that the reserve is in place in an ongoing fashion until the processor is comfortable with an accrued amount or successful processing history (little to no chargebacks). It’s important to note the majority of losses incurred by the processors are a result of chargebacks.

The entire reason for the reserve account is for the bank to have somewhere to draw from to pay off those chargebacks and refund the cardholders.

There is a common misconception that the processor uses reserve money used to pay chargebacks while the account is open and in good standing. This is false. The money to repay chargebacks is debited from your bank account. It is not taken from the reserve account. If the merchant account is closed or shut down, then the bank draws from the reserve account to pay any chargebacks that roll through. Since the bank may not have access to your normal checking account, this gives them little recourse should a slew of chargebacks roll in. This is where the reserve account comes into play.

What happens when a reserve ends?

Not every rolling reserve agreement is created equal. Depending on the level of risk, the rolling reserve percentage will vary and the reserve amount will fluctuate. For instance, a high-risk account may have a reserve of 10% capped at one month’s processing volume. This means that once the account reaches the specified amount of time/dollar value, the processor will stop taking a reserve. The amount will then live in the reserve account until the processor feels comfortable with the merchant’s processing history.

In the unfortunate event that the merchant account is shut down by the processor, or if the merchant voluntarily closes their account, the bank reserves the right to hold funds for up to 180 days.

The 180 days (6 months) corresponds to the chargeback liability period. In the United States, the chargeback liability period is 6 months from the date of the transaction or service rendered. This means that the cardholder has up to 6 months to dispute a charge. The processor holds the funds in anticipation of those chargebacks rolling through. If in that period, post-termination you do not receive any chargebacks, the bank will often release the majority of the funds sooner.

How does it effect your business?

A rolling reserve does not affect your business in any other area than your cash flow. The reserve is taken out at the transaction level, so it will not affect your monthly budget.

Keep in mind, the reserve is still your money. It is not a fee. After the specified period in your reserve agreement, the processor will return the funds to you, assuming you do not incur too many chargebacks.

Benefits of a Rolling Reserve

1. The biggest benefit of a rolling reserve is that it helps you secure a merchant account for your high-risk business. High-risk businesses often face the struggle of convincing a processor to take on their risk. Rolling reserves are meant to ease this process.
2. Secondly, a rolling reserve is comparable to a forced savings account. You are “forced” to put aside a set amount of money, providing you with extra capital once the money is returned to you.

Disadvantages of a Rolling Reserve

• A rolling reserve affects your cash flow, as a small percentage of every transaction is withheld.
• Once the account is shut down by the processor, they have the right to hold the funds for up to 180 days (due to the chargeback liability period)

Types of Merchant Account Reserves

Not all account reserves are created equal. Processors use different methods for obtaining and holding funds. However, reserves usually fall into one of these four categories:

Rolling Reserves

When people talk about a merchant reserve, they’re usually referring to what’s called a “rolling reserve.” With a rolling reserve merchant account, a percentage of each credit card deposit is held in reserve for a predetermined time, then released. The amount held back is usually 5-15% of the account balance.

For clarity’s sake, let’s use 10% as the amount held back, with a 6-month hold. Each month, 1/10 of your sales will be deposited into your reserve. When you reach the 6-month mark, however, your reserve funds will start being released, based on how much was added 6 months prior.

The amount held in a rolling reserve remains constant. So, as funds get released (usually on a six-month schedule), new funds get added. The amount in the reserve “rolls” forward every month. There is no cap on how much your acquirer holds in reserve; it is a straight percentage of sales. However, the acquirer cannot hold funds for longer than the hold period.

Capped (Accrual) Reserves

A capped reserve account also accrues funds by withholding a percentage of monthly sales. There is one key difference setting it apart from rolling reserves, though.

Here, once the agreed upon cap (fixed amount) is reached, no additional funds will be held. The fixed amount—typically half the merchant’s monthly processing volume—will remain in reserve for the duration of the merchant agreement.

To illustrate, let’s say you process $10,000 in sales every month, and have a $5,000 capped reserve. The acquirer would hold back 10% ($1,000) of your sales every month until the cap is reached. At that point, no further funds are withheld.

Up-Front Reserves

Like capped reserves, up-front reserves require a fixed amount based on your expected monthly volume. This amount must be placed in escrow at the beginning of the processing agreement. However, your acquirer doesn’t hold any percentage of your monthly sales. Temporary reserves will typically be an up-front amount, but one that is released once the trial period has ended.

Special Reserve Accounts

Individual processors may have their own proprietary arrangements in addition to the generic account types outlined here. For example, there is a PayPal reserve hold, an Amazon rolling reserve, a Stripe rolling reserve, and so on. These share much in common with a typical rolling reserve merchant account. However, they may have additional features or requirements unique to the brand.