Merchant Account Reserve Funds

Table of Contents

1. What is a merchant account reserve?
2. What are the different types of merchant account reserves?
3. When are merchant account reserves required?
4. Are acquirers raising reserve requirements?
5. Addressing chargeback problems
6. What is a payment acquirer?
7. What is a reserve account in terms of merchant processors?
8. How long does it take to set up a new merchant account?

The reason merchants have no choice but to spend valuable time and money on chargeback management is that, at the end of the day, they’re the ones stuck with the liability. One way that acquiring banks ensure that merchants pay for chargebacks is by requiring them to maintain a merchant account reserve, a minimum fund balance that exists to cover the cost of chargebacks and other potential losses.

With chargebacks on the rise, some acquirers are considering the possibility of raising their merchant account reserve requirements. What do merchants need to know about these reserves?

The onset of the COVID-19 pandemic caused events and travel plans to be canceled across the globe, causing waves of chargebacks to hit countless unfortunate merchants in related industries. In addition, the sudden wave of unemployment caused many cardholders to file friendly fraud chargebacks for purchases they felt they could no longer afford.

Studies have shown that once a cardholder files a successful chargeback, they're likely to file more chargebacks in the future. After someone has gotten their money back with little effort once, they tend to keep that option in mind when future issues arise. Therefore, while the initial wave of chargebacks has passed, it's likely that chargebacks overall won't decrease back to pre-pandemic levels without intervention.

Acquirers have taken note of these issues and are looking at ways to protect their financial interests. As many as one out of five merchants may have been approached by their acquirer about an account reserve increase, according to one insider.

While no merchant is going to be happy about the prospect of their hard-earned funds tied up in reserve balances, some may benefit from having those funds available in their account to absorb a spike in chargebacks. Depending on your agreement with your acquirer, this may save you fees and other charges that you might incur if you get a chargeback and don’t have the funds to cover it.

If the acquirer incurs unexpected losses on behalf of the merchant due to fraud, business closure, or chargebacks, they can take it out of the merchant account reserve.

The chargeback process follows a set order of operations. Once the issuing bank initiates a chargeback, the acquiring bank is obligated to return the disputed funds. The acquirer, in turn, takes those funds from the merchant. While the merchant’s agreement with the acquirer means they’d be liable regardless, the account reserve means that the acquirer doesn’t have to wait for the merchant to reimburse them — they’re already holding the funds.

There are several different account reserve types that merchants may encounter. The type and minimum amount of a merchant account reserve — and whether or not the merchant is required to carry one at all — may depend on a variety of factors, including merchant history and risk assessment.

Rolling reserve

This account type takes a certain percentage of each transaction, usually 5 to 15%, and places it in the merchant account reserve. After a set period of time, usually 6 to 12 months, the funds from that transaction will be released back to the merchant’s operating account. This is the most common type of reserve.

Capped reserve

Also known as an accrual reserve, this is similar to a rolling reserve but instead of releasing funds after set time periods, it stops deducting a percentage from transactions once a certain reserve cap is reached.

Up-front reserve

With this type of reserve, the merchant must provide a set fund amount at the outset. This amount is typically based on the merchant’s projected monthly transaction volume. If the merchant cannot put up the required funds immediately via cash payment or credit from another bank, the acquirer may allow them to fund it by holding all of their transactions until the minimum reserve is reached.

• No previous account history
• Bad credit
• Excessive fraud or chargeback rates
• High-risk industry (adult entertainment, gaming, gambling, lending)
• High transaction processing volume
• Processes card-not-present transactions
• Compliance violations

Your agreement with your acquiring bank should clearly spell out when merchant account reserves will be required and how minimum balances are calculated.

Your acquirer may not automatically realize it if your situation changes and you no longer meet the criteria, so be sure to contact them if you find yourself carrying a merchant account reserve that you don’t want and are no longer required to maintain.

Some merchants may be required to maintain reserves for the duration of their relationship with the acquirer. Except in the case of rolling reserves, where each deposit into the fund is released back to the merchant after a certain amount of time, the merchant will only gain access to the reserve funds once they close out their account.

When an increase in chargebacks or any other trigger event occurs, the acquirer can choose to impose a reserve requirement on a merchant who didn't previously have one. For merchants who already have reserves, the acquirer can raise the level of funds required.

Acquirers may ask the merchant to provide additional funds in the case of non-rolling reserves, but usually have the right to take funds from new transactions if they need to.

When an acquirer imposes a reserve or increases the reserve level, the notification the merchant receives will typically include the specific reason for the change.

If your acquirer has increased your reserve requirements, the best way to correct the issue is by addressing whatever factor caused the increase. If the trigger was chargebacks, you need to find effective ways to prevent them.

Addressing chargeback problems

The cushion of a merchant account reserve may be a welcome thing for merchants dealing with high chargeback numbers, but a well-used merchant account reserve may also be a sign of a chargeback problem that isn’t being adequately addressed.

While merchants in all sorts of markets are dealing with higher than normal rates of chargebacks right now, that doesn’t mean that you should accept a surge in chargebacks without questioning it. While there are legitimate causes for many pandemic-related chargebacks, there are also lots of fraudulent chargebacks, both from opportunistic fraudsters and from regular customers.

If merchant account reserve requirements are increased, many merchants will see their revenues drop as a percentage of every transaction is taken to build their reserves up. This may be unavoidable, but the impact can be mitigated by avoiding and fighting chargebacks whenever you can do so effectively.

After all, if you’re not dipping into your merchant account reserve very often, you won’t have to tie up much of your future earnings to build it back up again.

For merchants who want to prevent and fight chargebacks as effectively as possible, both to reduce reserve requirements and to improve their business overall, a professional chargeback management company may be the answer. Chargeback experts can provide the tools and experience necessary to prevent chargebacks, while also fighting illegitimate chargebacks on your behalf, with a higher win rate than you could ever achieve alone.

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