11 May Why a Merchant Account Provider Requires a Cash Reserve
For most businesses today, a merchant account is an absolute necessity — the vast majority of customer payments occur via credit or debit card. Depending on the specific case, the merchant account provider may require a cash reserve. Business owners seeking to begin credit card processing would do well to familiarize themselves with this requirement.
Reserve is cash held by the provider of the merchant account in anticipation of future, possible chargebacks, disputes or other expenses; it is also known as hold back or rolling reserve. The provider needs this money held to protect itself from loss. Any new, risky business will most likely have the reserve requirement imposed on its account; such a high-risk venture may also pay processing rates that are slightly higher.
Cash reserve can be funded and maintained in different ways depending on the merchant account provider. Usually taken from ongoing transactions, the reserve may sometimes be held separately in escrow. Rolling reserve functions on a month-by-month basis. Each month, the reserve is held. At the start of the next month, the reserve for the prior month is released. The rolling reserve period may even extend to 180 days. However, the reserve must sometimes be paid as an upfront fee. This is typically required of new businesses with no established revenue history. After demonstrating an acceptable revenue performance to the account provider, the business will see the upfront reserve lifted.
The function of reserve is risk mitigation for the merchant account provider. To avoid losing money, most providers will require the business to maintain a reserve account at their bank. Thus, in event of fraud or a sudden jump in the returns rate, the provider can issue a cash hold on this account to protect itself. The minimum reserve balance is usually 20% of estimated revenue per month. This estimation can be computed based on historical performance of comparable businesses. A new business may be allowed to accrue its reserve via inbound transactions that are held back. Most businesses will not be able to access reserve funds as long as the possibility of chargebacks exists, which may extend to six months. Should a business sell a yearly subscription to something, they may have to wait 18 months for cash reserves to be released.
When a business owner understands the purpose of the reserve, they accept that it is necessary to establish the account and commence credit card processing.