What is a Merchant Account Reserve?

Fri 16th Nov 2018

Merchant account reserves (also known as retained earnings) is a portion of a business’s turnover that is set aside by the merchant acquirer to help strengthen the business’s financial position. The merchant account reserve is essentially a security deposit.

The funds in the security deposit (reserve account) can then be used for any unanticipated costs. For example, if a customer requests a charge back but the business’s cash flow doesn’t have enough funds, the merchant account reserve can be used to help cover these costs.

A merchant reserve account is sometimes only required for the first few months after opening an account, or if a business is considered high risk then the account may be required indefinitely.

There are different kinds of reserve accounts. The account selected for a business can depend on the type of business and business risk.

Rolling Reserve
A rolling reserve is a risk management strategy which helps protect the merchant and its accounts from potential loss. Usually, acquiring banks calculate a percentage of each credit card amount processed during a transaction, securing and holding the funds in the rolling reserve account for around 6 to 12 months. The rolling reserve account then gradually releases the funds back into the business’s cash flow.

Capped Reserve
A capped reserve account is where the acquirer holds a percentage of each credit card transaction until a fixed (capped) amount is reached. The capped amount is usually held at the merchant’s monthly processing volume. When the capped amount has been reached, no additional funds will be reserved. A capped reserve doesn’t require upfront financial commitment.

Upfront Reserve
The upfront reserve is also based on a percentage of the merchant’s expected monthly income. This reserve is required upfront, at the beginning of the merchant’s relationship with the acquirer. The upfront reserve can be collected in three different ways: either 100% of the transaction deposits can be held in the reserve account until the total goal is met, the merchant may be asked to transfer funds of an agreed amount from their checking account or a letter of credit may be required from the merchant’s account.