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Understanding Merchant Account Reserves

October 1, 2013 • by shall

It doesn’t occur very often, but there are times when a merchant will find that some of their sales deposits cannot be released to them because they are being held in an escrow account called a reserve.  

The reason some monies are held in reserve is due to the fact that when a processor agrees to handle a company’s credit-card transactions, the processor then becomes responsible for all customer refunds. If an unhappy consumer asks their credit-card company for a refund, the credit-card issuer gets that money from the processor. The processor will then pull the money from the merchant’s account.

Business Bankruptcy

But what if the merchant has gone under?  If that is the case, the processor will have to eat the loss. Since business bankruptcies are on the rise, processors fear dishonest merchants might close up shop and skip town, leaving the processor on the hook for any refunds.  Some dishonest merchants will create lots of transactions before bankruptcy so processors keep an eye out for red flags such as unusual amount of chargebacks or a sudden surge in large dollar sales.

High-Risk Businesses

Sometimes reserves will be imposed on merchants from the get-go if they have a high-risk type of business due to historical high chargeback levels or if they have no credit card processing experience.  Reserved funds do not remain in reserve indefinitely and are usually released after a predetermined period of time, such as six months to a year. If it is decided that a rolling reserve is needed, a predetermined amount is held every month for a certain period.

One month following the expiration of this period, the initial month’s reserve amount is released to the merchant. The following month the merchant gets the second month’s reserve amount and so on until there is no longer a reserve. Since every processor has its own underwriting policy, it is recommended that you receive several credit card processing proposals. In addition to reserve requirements, make sure you also consider other factors such as: processing costs, fraud prevention, customer service, and software capabilities.

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