The search for an affordable and reliable high-risk merchant account can be full of hurdles. However, when you have an experienced high-risk merchant account provider, these hurdles are easily jumped. One hurdle that is, many times, difficult to overcome and/or manage is the requirement to create a reserve account.
Often, when a high-risk business looks to get approved for a merchant account to accept credit cards, the bank will require them to establish a reserve account. But many merchants don't understand what a reserve account is or how it works.
How will it affect your high-risk merchant account and your business? And should you accept a merchant account that requires a reserve? What can you do to get your reserve requirement removed?
We're here to help.
In his article, we’ll quickly explain what a reserve account is and who will most likely be required to open one. We’ll cover the two types of reserve accounts and how they work. And finally, we’ll discuss what having one can mean for merchants. Then we’ll talk about how you can get the best possible rates and terms for your business.
High-risk payment processing doesn't have to be expensive and daunting. At Bankcard International Group, we make it easy!
Let’s start out with what a reserve account is!
What is a reserve account?
This is a question we often get asked when it comes to high-risk payment processing. Then it is quickly followed up with “Am I going to be required to establish one?”
Quite simply, a reserve account is a non-interest-bearing bank account the acquiring bank will establish on your behalf. It is most like an escrow account where a percentage of your credit card sales are held for a specified period of time. Generally 180 days.
The reserve, for all intents and purposes, is held back to help mitigate any risk the acquiring bank takes on with your merchant account. They establish this account to protect themselves against fraud and/or numerous consumer chargebacks. This protects them in the event that the merchant is unable to repay those funds.
Generally, depending on a number of factors, such as industry, processing history, and merchant credit history, the reserve is held for about 180 days.
So, essentially, a reserve account is set up to protect the bank from fraud and chargebacks.
Now - How do reserve accounts work?
Once your reserve account is set up, and you begin processing credit and debit cards, the bank will begin collecting your reserve. The reserve is usually collected as a percentage of your monthly sales. General 5%-20% of your sales volume. The bank will deduct this amount from your transactions prior to depositing your funds into your merchant account. This money will be deposited into your reserve account and remain there until it has met the terms.
There are two types of reserve accounts. They can either be set up as a rolling account, or as a capped reserve. A rolling reserve is a Fixed percentage of your monthly sales. A Capped reserve is a percentage of your sales up to a fixed dollar amount.
That set dollar amount will stay in the reserve account for the set period until you can prove clean processing history to the bank. And the bank feels safe and that they don't need to protect themselves from you anymore.
So, let’s break down the two types of reserve accounts and how they differ.
What is a rolling reserve?
As we’ve said, a rolling reserve is based on a fixed percentage of your monthly sales transactions. The amount held is usually between 5-20% for a “rolling” period of up to 180 days. The percentage held back is set by the acquiring bank’s underwriting guidelines based on their risk tolerance.
So what does that mean? It means that if you sell $100,000/month, between $5,000 & $20,000 will be placed in your reserve account for up to 6 months. At which time, the funds are released each month for the earliest month in the 6-month cycle. As an example, the rolling reserve funds held through the end of July will be released in January. The bank will release August reserves in February. And so on and so forth.
So for 6 months you will miss a percentage of your sales. But on the 7th month, you will still give up your reserve percentage, but you will be funded a month’s worth of reserve.
A rolling reserve is the most common type of reserve account used in high-risk credit card processing today.
What is a Capped reserve?
A capped reserve, on the other hand, has a specific dollar amount the bank wants held in the reserve. The bank retains a percentage of your sales transactions until you reach the fixed (capped) amount. Typically, the reserve amount will equal one half of the monthly processing volume of the merchant.
They only withhold funds from your monthly transactions until the reserve is met. But the funds will remain in your reserve account for the life of your merchant account.
What risk is the acquiring bank trying to mitigate with a reserve?
In high-risk merchant services, acquiring banks can get left with a lot of liability due to chargebacks. When a merchant has a large volume of chargebacks, the acquiring bank will have refunded the transactions to the cardholders accounts. The acquiring bank gets stuck with that bill if they are unable to collect from a merchant. So the reserve is put into play as a buffer.
Many business types can be required to establish a reserve account. These business types include international business, support services, subscriptions and recurring billing, and businesses with debatable moral implications (like the adult industry). Also, businesses that have been placed on the MATCH list are likely to be subject to rolling reserves. The reserve account provides the acquiring bank with the liquidity to offset their risk exposure.
Now, are you going to be required to open a reserve account?
Whether you'll be required to establish a reserve account can vary wildly depending on the industry you're in, and how you're processing.
For instance, if you’re looking at an offshore processing solution. Then yes, most likely a reserve account will be a term of your merchant account to accept credit cards. This is because most offshore merchant accounts require rolling reserves.
However, domestically, there can be a number of triggers that cause the acquiring bank to require a reserve account as a term of your merchant services. For instance, your personal creditworthiness, the length of time in business, the industry you're in, and the products you're selling can all increase their liability. And any other number of factors that can come into play, including your processing history.
How will a reserve account requirement affect your business?
Before jumping into a high-risk merchant account with a reserve, there are many things that should be considered. A rolling reserve can have profound effects on a business whose margins are thin, is just getting started, or is in a very competitive market.
There are 3 main effects that the reserve will have on your business are mostly cash flow related.
The first and most obvious problem is cash flow. Since the money is just sitting in a Non-Interest-bearing account, it’s not actively available to invest in your business. Ensuring that your business has enough Net profit (after the reserve) to pay for expenses can be tricky, especially if it’s a new business or one with low profit margins.
Choked cash flow could also affect your competitive edge. Remaining competitive with both pricing and advertising requires cash flow. If your merchant account requires a rolling reserve while your product pricing must be highly competitive, the reserve may be an impossible condition for your business to accept.
Finally, without sufficient cash flow, and/or savings, your business may have trouble hitting its growth projections. Be sure to calculate the effects of a rolling reserve on your growth projections and business plan before signing up for a high-risk merchant account.
Should you accept a high-risk merchant account with a rolling reserve?
Well, the answer to that question is not so easy! This is unique to every business model. Many business types simply cannot exist without a merchant account to accept credit card payments. While others may be able to work on a cash, check, or ACH payment basis. Some businesses are simply in such a competitive market that they are unable to support the cash flow problems associated with a rolling reserve.
However, if your business projections are able to sustain a rolling reserve, and to achieve those projections your business needs to accept credit cards, yes, you will benefit from a high-risk merchant account. Even if it requires a reserve account. Doing so may actually provide a competitive edge against the competition whose business model may not be able to sustain one.
Can you get a reserve account requirement removed?
Yes. A rolling reserve requirement, oftentimes, can be removed from an account after 6-12 months of good processing history. So, what constitutes a good processing history? Simple. For most acquiring banks, it’s about consistency. They want to see a consistent chargeback ratio under 1-2%, consistent monthly sales volume (matching what the account was approved for), and a low refund ratio.
Those 3 items will determine the risk level of your account. Many acquiring banks or aggregate managers will remove the reserve requirement if they all fall within their thresholds as long as those numbers are maintained.
Therefore, it is extremely important to have an experienced merchant service provider like Bankcard International Group (B.I.G.). One who knows and understands the industry. And one who knows how to negotiate the absolute best terms for your merchant account.
If you’re high-risk, demand an experienced high-risk merchant service provider.
At Bankcard International Group, we pride ourselves in working transparently and always in the best interest of our clients. We have a vast and thoughtfully curated network of banking partners. Whether you’re looking for the most competitive and dependable high risk merchant account to accept credit cards, ACH payment processing, or any other merchant service, B.I.G. has the solution your business deserves.
If you are being told that your merchant account requires a reserve, and you need a second opinion, contact us. One of our certified payments professionals will be happy to consult you regarding your options and work to find the most workable high-risk solution for your business.
So, if you have any questions about your existing merchant account, or you'd like B.I.G. to establish a new high-risk merchant account for your business, call us. One of our ETA Certified Payment Professionals would be happy to talk you through the process. It's our goal to find the absolute best solution for your business.