When you run a retail business, particularly one with an online presence, you are vulnerable to risks. Customers might saddle you with an inordinate number of chargebacks; the company could commit fraud or be decimated by a data breach; or it might go bankrupt or fail to live up to an agreement.
Rolling reserves protect payment processors against these events. But just what is a rolling reserve, and how can it affect your operations as an entrepreneur?
Rolling reserves defined
Payment processors use rolling reserves as insurance policies. They work like this: The payment processor, often a high risk merchant provider, partners with businesses that are more susceptible than normal to chargebacks, security incidents, costly regulations and sudden bankruptcy.
To minimize their risk, they require the merchant to set aside a certain percentage of their monthly turnover for a predetermined period of time.
During those months, the merchant can view the account where these funds are held but cannot have direct access to the money.
While the funds are being held, the merchant account provider can draw upon it if events like chargebacks and data breaches occur in order to cover their costs. Anything that remains will be returned to the merchant when the rolling reserve time period is over.
How rolling reserves affect your business
No doubt, a rolling reserve is set up for the benefit of the financial institution or merchant account provider. It pays for chargeback protection services and other costs that the company might incur.
Although financial institutions are protected by the existence of the rolling reserve accounts that they require, this arrangement can have a negative impact on the affected companies. By definition, these accounts hinder cash flow since monies are captured in this special account until the prescribed time period is up.
The extent to which a rolling reserve will hinder your cash flow depends upon the proportion of your sales that are paid for with credit cards compared to those that are purchased through other means.
Generally, you can expect the rolling reserve amount taken to be anywhere between five and ten percent of your gross credit card sales amount. The exact amount varies according to both your sales numbers and the agreement put in place between you and your merchant account provider.
Modifying your rolling reserve agreement
You might be wondering if the rolling reserve agreement that you made with your high risk merchant provider is written in stone. The good news is that it is not.
However, in order to modify the contract, you need to demonstrate either that you are incurring fewer chargebacks or your business represents a lower risk than originally expected.
After showing evidence to the financial institution, they might agree to reduce the reserve amount or the time duration.
The bottom line about rolling reserves
Many companies, particularly those deemed to be in the “high-risk” category, are often unable to obtain the payment processing services they need unless they agree to fund a rolling reserve account.
Once they do, they will be allowed to partner with a merchant account provider that can offer them advantages such as industry expertise, added security tools and chargeback services that can help their company to remain safe and profitable even if it operates in a complex or volatile sector.
Additionally, having a good high-risk merchant account provider as a partner enables companies to have access to various payment options and readily available, industry-sensitive customer service.
That being said, rolling reserves have their disadvantages as well. They tie up cash, preventing companies from making immediate use of their funds for day-to-day needs, emergencies or future planning.
Although the funds will eventually be returned provided no chargeback or other costs arise, it could be as long as eighteen months before the merchant has access.
As you can see, rolling reserve accounts come with both benefits and costs. As you do your research to find the best payment processing company to meet your unique needs, it is important to learn whether your top candidates require that you open a rolling reserve.
This should be one of the many questions you ask as you determine which provider is the best fit for your company.
Rolling reserve accounts offer an insurance policy for merchant account providers that makes it possible for businesses that would otherwise be seen as too risky to be accepted for an account to be enrolled.
If you fall into this designation, view your rolling reserve account as a necessary evil, particularly during the first few months. If conditions warrant, you might be able to renegotiate your agreement after a sustained period of lower-than-expected chargebacks and risk.
