What is a Rolling Reserve?

A rolling reserve withholds a percentage of a merchant’s gross credit card sales in a non-interest-bearing account. The funds are held for a predetermined amount of time before the processor releases money to the merchant’s bank account.

Depending on your contract terms, the percentage of sales is typically held for 180 days, and the reserve account usually falls around 5-10% of gross sales. But this varies by the processor, business, and contract details. 

If you’re new to accepting credit cards or you’re shopping around for different processors, you might come across the term “rolling reserve” on your contract.

Unfortunately, rolling reserves are not pleasant for merchants. Account reserves can cause cash flow problems and create other issues. So if you have some doubts or questions about your contract, this guide will steer you in the right direction.

Continue below to learn more about what a rolling reserve means for your business and how to overcome the challenges associated with this contract stipulation.

How Rolling Reserves Work in Credit Card Processing

To fully understand the reason behind rolling reserves, you first need a firm grasp of how credit card processing works. When cardholders swipe, dip, tap, or enter their credit card information online to complete a transaction, they don’t actually pay for the amount immediately.

The issuing bank expects the consumer to pay their balance by a certain date, but the cardholder also has the option to pay the balance over time while incurring interest. 

Credit card processors operate the same way. When they release funds to the merchant, they’re actually issuing a credit to the acquiring bank. 

Even though the funds appear in your bank account within one or two days of the transactions, cardholders can dispute the charge and file a chargeback for a much longer period of time—usually up to 120 days.

While the merchant is ultimately responsible for the chargeback costs, credit card processors refund the cardholder immediately instead of waiting to get the money back from the merchant. 

The refund obviously requires cash, so some credit card processors impose rolling reserves to limit exposure and cover costs associated with chargebacks. 

The terms of a rolling reserve contract will vary. But here’s a simple example using a 5% rolling reserve on a 180-day cycle with daily payouts: 

Transactions on day one totaled $10,000. At 5%, this puts $500 into the reserve account. That $500 hold is ultimately released to the merchant on day 181 after the cycle has been completed. The $750 hold from transactions on day two get released on day 182, and so on.

What Types of Businesses Need a Rolling Reserve Account For Credit Card Processing?

No law requires certain types of businesses to have rolling reserves for credit card processing. This decision is solely up to the merchant services provider. Traditional merchant account providers and PSPs (payment service providers) alike may ultimately decide to impose a rolling reserve on certain accounts. 

The conditions of your rolling reserve should be clearly outlined in your contract. This will explain what type of balance must be maintained in the reserve account and for how long.

Truthfully, most businesses do not need a rolling reserve. So if a payment processor is trying to impose this on you, it’s likely that your business falls into one of the following categories:

• High chargeback rate
• Lack of credit card processing history
• Poor credit history
• Future delivery time windows for goods or services
• High-risk industry or high risk merchants

If you don’t fall into one of these categories, you should question the reason for the reserve. It might be in your best interest to shop around for another processor to see if they offer the same terms. 

But generally speaking, rolling reserves are designed for high-risk credit card processing. 

Depending on your processor, the rolling reserve might just be temporary. Even if you’re considered high-risk initially, the processor might ultimately lift the reserve requirement if you can establish a good history of low chargebacks. If the rolling reserve was imposed due to poor credit, a boost in your credit score could lift the reserve as well.

How Are Rolling Reserves Calculated?

Rolling reserves are part of the underwriting process, which means the exact calculation varies for each business. The reserve amount is based on a merchant’s monthly processing volume, but it includes other factors like the industry and how long the merchant has been in business.

If you’re comparing merchant account providers and obtaining quotes from different processors, you’ll likely see the reserve amounts fluctuate considerably between each quote.

How Much is a Rolling Reserve?

On average, rolling reserves are 5% to 10% of a merchant’s monthly gross credit card volume.

Some rolling reserves are variable, meaning the amount will change based on how much you process each month. Other rolling reserves are fixed, meaning the reserve amount stays the same even if you’re processing a higher or lower amount from month-to-month.

In some extreme scenarios, merchants may be required to have a rolling reserve that reflects up to 100% of their monthly card processing amount. This could happen if you’re a high-risk merchant that’s been placed on the TMF/Match List and can’t get approved for a merchant account anywhere else.

Pros and Cons of Rolling Reserves

Generally speaking, rolling reservers are not good for merchants, and it’s better to avoid them whenever possible. But in some cases, a rolling reserve can be a positive.

Benefits of Rolling Reserves

• Ability to accept credit and debit cards
• Secure payment processing if you’re a high-risk business
• You’re forced to save money in an account that will eventually be returned to you

Drawbacks of a Rolling Rolling Reserve

• Restricts cash flow for businesses
• Processors have the right to hold funds for up to 180 days for chargeback liabilities
• Some merchant account providers won’t approve your application without a rolling reserve contingency

Other Types of Reserve Funds For Credit Card Processing

Reserve merchant accounts typically fall into two main categories—capped and up-front. Here’s a brief explanation of each:

Capped Reserves 

As the name implies, a capped reserve restricts the amount of money that can be placed in your reserve account. Caps are usually based on a percentage of monthly processing and fall between 50% and 100%, depending on your volume.

Here’s an example. Let’s say your business processes $10,000 per month, and your processor imposes a capped reserve at 50% of your monthly volume. Once that 50% threshold is met ($5,000), no other funds will be held in reserve. 

Unfortunately, most capped reserves aren’t released back to the merchant over time. The processor withholds these funds until the account has been closed.

Up-Front Reserves

Also known as minimum reserves, this type of account requires the merchant to fund the reserve before they’re able to start processing credit card transactions.

This can be done by obtaining a letter of credit from your bank or transferring the funds directly from a checking account. If you don’t have the cash or credit to fund an up-front reserve, some merchant account providers might withhold 100% of all transactions until the minimum reserve balance has been met. 

Agreeing to a reserve can help ensure that your merchant account application won’t get denied.

Final Thoughts — How to Overcome Rolling Reserves

I’m not going to sugar-coat it—rolling reserves, or any reserve accounts for that matter, are less than ideal for merchants. That’s because it can create cash flow problems and cut into your profit margins.

If your business is subject to a rolling reserve account, you should find out if it’s something that’s temporary or permanent. Over time, you might be able to get the reserve lifted, and get a basic merchant account without any strings attached. 

Like most aspects of credit card processing, rolling reserves are negotiable. With the right assistance, you might be able to talk down the reserve amount or percentage. Over time, the reserve could be lifted altogether.

During these negotiations, it’s in your best interest to seek help from a professional. Here at Merchant Cost Consulting, we negotiate with credit card processors on behalf of our clients every day.

So if you need some assistance and want to save money on high-risk credit card processing or have questions about high risk merchant accounts, reach out to our team today.