Operating a high-risk business isn't for the faint of heart.
High-risk businesses have difficulties with almost every part of running the business. Especially with getting set up to accept payments. There's a lot of red-tape involved when getting approved for a merchant account to accept credit cards. And when they finally do, they're almost always told they must pay a rolling reserve.
This can be really scary for a business owner who's concerned about turning a profit and growing their business.
In this article, we'll cover why you're being required to open a reserve account. We'll also explain what a rolling reserve is and how it will affect your bottom line.
Rolling reserves don't have to be a death sentence for your business. As long as you know what to expect and how to handle them. So let's dive in.
Why am I required to have a rolling reserve on my merchant account?
The need for a reserve account is an underwriting decision, so there's no negotiating with your salesman. When processing an application, underwriters must determine the risk factor the business imposes.
Many businesses have a high incidence of chargebacks and that can expose the bank to significant risk. When a customer files a chargeback, the processor immediately refunds the customer's card. The bank is out the money while an investigation is performed as to the validity of the claim. This can cost the bank large sums of money if they have merchants who have a lot of chargebacks.
The reserve account serves as a chargeback management strategy to protect the bank from financial loss. If your processor will only give you a merchant account with a rolling reserve it is most likely due to high chargebacks.
What is a rolling reserve?
Each month a percentage of your credit card sales are held in an escrow account called a reserve account. These funds are held back in order to safeguard against paying for the chargebacks filed against the business.
Generally, reserves are held for 180 days before being released to the merchant. This is because customers can file a chargeback claim for 180 days after purchasing an item with their credit card.
After the first 180 days, the bank will begin to transfer the oldest funds to the merchant account. Whatever portion of the money held that has reached 180 days will be funded to the merchant. However, they will continue to take the daily percentage into the reserve. This is why they refer to it as "rolling".
What does a rolling reserve mean for your bottom line?
Standard reserves can range from 5-10% of your monthly credit card sales. So if you have credit card sales of $100,000 month, at a 10% reserve they would keep $10,000 every month. This money is placed in a non-interest bearing escrow account for 6 months. In the 7th month, the processor will release the first $10,000 to the merchant. And so on...
Having to give up a percentage of your profits right off the top can leave a business with cash flow problems. Especially if it has small profit margins or is starting out.
Are rolling reserves permanent?
Through the reserve account, the acquiring bank has the liquidity to offset risk. Once you can show 6-12 months of good processing history you can have your account reviewed. If you can show them you're not a big risk, you could have the reserve requirement removed.
There are 3 main things that banks look at to determine a business's risk level. First, they want to see the monthly volume match what the account was approved for. They want you to keep your chargebacks within the chargeback threshold of .9%. And you must show a low refund-to-sales ratio.
To keep chargebacks in check, it may require the use of fraud and chargeback management tools. But it is worth it to remove your reserve, and you'll lower long-term costs and fees along with it.
Many acquiring banks will remove the need for a reserve account as long as you can keep those 3 items in check.
Should you accept a rolling reserve with your merchant account?
The most obvious detriment to business is the strangle the reserve puts on your cash flow.
Whether a business should accept a merchant account that requires a rolling reserve depends on many things. There are a lot of business types that can operate fine accepting cash, check, and ACH payment options. Others would not survive without accepting credit card payments.
Be sure to perform profit/cost calculations to make sure your net profit (after the reserve) is sufficient. Will you have enough profit left to support expenses? Will paying into the reserve affect your pricing and ultimately your competitiveness?
Reserve accounts serve a purpose in servicing high-risk merchants.
Not being able to accept credit cards could greatly hinder a business. Rolling reserves allow a business that otherwise wouldn't qualify to have a merchant account to accept credit cards.
If you're a high-risk merchant, it's best to look for a provider experienced in the high-risk sector.
High-risk businesses tend to have few options. This makes them easy targets for unscrupulous salesmen. If you're a high-risk business, make sure to find a merchant account provider educated high-risk payments.
Terms of a rolling reserve merchant account vary from processor to processor. Of course, it's important to consider the terms of the reserve requirements. But it's more important to consider the terms of the merchant account as a whole.
High-risk merchant accounts come with higher processing rates and additional fees. But are your rates fair, and transparent? Being high-risk doesn't mean you have to settle for being taken advantage of.
Are they requiring you to sign a long-term contract? What kind of support do they supply you once you are processing? Consider the ongoing effects of these before you sign a long-term contract.
Always thoroughly read through the terms and conditions before signing the contract. And, if there is anything you don't understand, make them explain it to you.
An experienced high-risk merchant service provider can make all the difference.
They know what underwriters want to see and they're able to anticipate problems in advance. Because of this your application process goes smoothly and results in approval.
If you’re looking for high-risk payment processing look no further than Bankcard International Group. Our team has decades of experience in the high-risk payment processing industry. This has allowed us to create reliable banking relationships to bring our clients the dependable services they need to succeed.
It’s our goal to provide our clients with service-oriented merchant services. We believe that merchant services should be both dependable and affordable.