When a business integrates credit card payments as a payment option, it has to obtain a merchant account with the bank. This is generally done through best Merchant Services. The cost of this service can vary a lot depending on the kind of business, how the transactions are done, and the historic risk of loss. Merchants are classified by merchant processors into low-risk and high-risk merchants. The payment processing companies prefer to work with low-risk merchants. High-risk here pertains to the higher number of chargebacks on credit cards.
The “Rolling Reserve” is a buffer for future chargebacks. It is created for buyer protection. Normally when a new merchant starts accepting credit card payments, the banks for a certain period of time like 90 days, 180 days or sometimes, even more, retain a portion of the transaction amount provisioning for any possible chargebacks from the credit cards.
Rolling reserve is much higher for high-risk merchants who have
- Higher number of transactions.
- A good number of chargebacks.
- Larger transaction amounts.
- Merchants with poor credit rating.
Generally, the rule applied is more the risky business, higher the rolling reserve amount. Sometimes in certain cases, banks may request for withholding 100% of the amount for a period of 6 months or so. This affects the business negatively.
Drawbacks of Rolling Reserve
- The rolling reserve amount is held in an account that does not accrue interest which is a disadvantage.
- The cash flow is affected as the funds are not available for the day to day needs of the business.
- Having to deposit a specified percentage of your revenue from credit card payments can severely hamper your cash flow.
- The more your credit card transaction, the chances of the rolling reserve being higher is more. This can cause financial bottlenecks in your business.
Alternate Solutions
Capped reserves – They are a better alternative as a percentage of each transaction is retained till it reaches a pre-determined amount. This way the reserve created is based on sales instead of time.
Upfront reserves – This is the best option for merchants who are able to deposit a certain amount upfront at the beginning. A surplus fund is the pre-requisite.
Letter of Credit – this is another alternative where the merchant is not able to deposit funds. They can present a letter of credit to the merchant processor informing that access is available to funds to cover for the reserve.
Outright withholding – Businesses can instruct the bank to withhold the total receipts from credit card transactions till the specified amount is reached.
Precautions
You must have a good customer care team that attends to customer queries and complaints proactively. This will reduce the number of chargebacks which will enhance your account rating. The rolling reserves for low-risk accounts are much lesser. This frees up funds for utilization to run your business. Also due to lesser chargebacks, your sales volume can be maintained high.
Conclusion
It is a fact that most third-party processors or acquirers mandatorily require the merchant to deposit a certain amount towards rolling reserve when the merchant account is opened. This is done to cover the potential risk that is related to chargebacks. The merchant can opt for the alternates explained above. Also, Merchant Cash Advance can be availed for short-term requirements of the business.