If you’re a business that accepts card payments, you must have encountered various processes and tools designed to ensure seamless transactions and mitigate any risks of chargebacks or fraud. One such solution is known as a rolling reserve. Yet, what does this concept represent and why are rolling reserves necessary for card processing?
In this article, we’ll dig into rolling reserves, exploring what they are, how they work as well as the difference between fixed reserves and rolling reserves. We’ll also explore how businesses can benefit from rolling reserves.
What is a rolling reserve?
A rolling reserve is a form of risk mitigation used by an acquirer or payment service provider and accounts for any losses they could incur from transaction processing. With the rolling reserve, the acquirer withholds a percentage of a merchant’s gross processed transactions on an agreed-upon schedule. This is to create a financial safety net and cover potential disputed charges, chargeback fees or other expenses when they arise.
The rolling reserve conditions are defined in the merchant’s processing agreement with their payments partner. In fact, the amount reserved is deposited in an interest-free account for a pre-determined time that’s specified in the agreement, and the merchant can access and view the rolling reserve accrued. The rolling reserve typically works on a monthly rolling basis. However, this will depend on the agreement you have in place with your payment service provider. For example, if a 10% reserve is applied for six months, it suggests that the acquirer will deduct 10% of the merchant’s processed volume from their gross transactions for the first six months. On the seventh month, while another 10% will be subtracted from the merchant’s volume, the 10% that had been withheld from the first month will also be released to the merchant.
It should be noted that the rolling reserve will only impact payment card transactions for Visa and Mastercard transactions unless other card providers specifically include a reserve requirement in their processing agreements.
Does my business need a rolling reserve merchant account?
During the onboarding process, all merchants go through due diligence and security screening. As part of these steps, it will be determined whether a rolling reserve would be necessary to help protect the business’ account.
Generally, it’s not obligatory for business to have a rolling reserve merchant account for card processing. However, for some industries like travel, having a rolling reserve may be a requirement for their payment service provider or acquirer.
The idea of a reserve is to cover potential negatives that may occur as a result of incoming chargebacks and other financial liabilities. Depending on the requirements of the acquirer, a rolling reserve may not be necessary for merchants.
How does a rolling reserve work?
As explained above, the acquirer or payment service provider holds a percentage of each transaction’s total amount in a non-interest account for a specified period of time.
The timeline is between 30 days (a month) and 180 days (six months), typically because a consumer usually has 120 days from the date of the purchase to file a chargeback with their issuer. Of course, the timeframe is also reliant on several other factors, including:
- The payments partner that the merchant works with
- The business model
- The merchant’s risk level
- The payment types the business processes (be it domestic or cross-border transactions)
- The industry the business operates in
There’s also a common misconception that the acquirer or payment service provider will dip into the reserve amount to repay chargebacks. This is not the case. Instead, the merchant account will be debited to repay a chargeback.
The only instances where funds will be pulled from the reserve account to cover any chargebacks is when the merchant account is closed due to business failure. Another instance could be when merchants stop processing payments, which means there won’t be any new settlement balances created. Although there won't be any new settlement balances, there could still be existing negative balances from previous transactions (e.g. chargebacks, refunds, etc.). In this case, the accumulated funds from the rolling reserve may be used to cover these negative balances.
To put it simply, the reserve account is somewhat an insurance policy for the acquirer or payment service provider. After 180 days, the reserve period is complete and the reserve amounts are released gradually and based on a pre-agreed schedule. This could be on a daily or monthly basis.
Rolling reserve vs fixed reserve — what’s the difference?
While an amount is held by the acquirer or payment service provider in a reserve account for both a rolling and a fixed reserve agreement, there are distinct differences between the two concepts. This is the way a merchant’s funds are kept and released by the payment service provider or acquirer.
More precisely, a fixed reserve is a set percentage of funds taken from each transaction until the pre-defined release date. These funds can be also deposited by the merchant to the acquirer or payment service provider upfront or accumulated over time as the merchant starts processing payments. On the set date, the full amount held in reserve is paid out to the merchant.
On the other hand, a rolling reserve includes the gradual and ongoing release of funds and the schedule is based on an agreed-upon timeline. As transactions move beyond the rolling window, they’re released to the merchant, while the remaining portion continues to be reserved.
Advantages of rolling reserves
Rolling reserves can present a couple of benefits for merchants like:
- Securing a merchant account: rolling reserves can help businesses operating in specific industries like travel to open up a merchant account and access payment processing services that would otherwise have been challenging to obtain.
- Covering chargeback expenses effectively: a rolling reserve helps safeguard all parties within payment processing, as it ensures chargeback costs are covered when they emerge.
How emerchantpay can help
Rolling reserves play a vital role in protecting businesses, particularly those operating in specific industries, from potential financial setbacks. Their benefits in terms of risk mitigation make them a valuable tool for mitigating the impact of chargebacks.
Here at emerchantpay, we’re passionate about helping businesses of all sizes and industries to navigate the complex payment ecosystem. We can help you accept payments seamlessly with our all-in-one PCI compliant payments solutions for online, in-app and instore purchases. Alongside this, we offer various payment methods and international transaction processing options.
We’ll help you find the ideal solution for your business and customers, which includes advanced fraud monitoring systems and flexible integration options like hosted payment pages. Plus, you’ll have access to your very own Account Manager, Risk Analyst and 24/7 technical support to help your business grow and succeed.
Ready to find out how emerchantpay can keep your business secure and thriving? Contact our team of payment experts today.