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.