What is a Merchant Account Reserve?
Merchant Account Reserves & Revenue Holds Explained
Like any other business, the primary goal of an acquiring bank is to make money. Of course, serving as a merchant acquirer entails a certain level of risk; however, acquirers typically offset this risk through a practice known the merchant account reserve.
For each MID they possess, a merchant likely has a merchant account reserve. So, what are merchant account reserves?
Merchant Account Reserves Explained
A merchant account reserve is a predetermined pool of money in a merchant’s account set aside by the acquirer. The merchant account reserve essentially serves as a security deposit for the acquirer, guarding them against any unanticipated liability resulting from a merchant’s actions.
If, for example, a customer requests a chargeback but the operating account doesn’t have sufficient funds, the merchant account reserve can be used to cover the cost of that dispute, insulating the acquirer against any financial loss.
A merchant reserve account may be required only for the first few months after opening an account, or it may be required indefinitely. Each acquirer is different, but before a merchant can start accepting transactions, the bank will typically request a reserve if any of the following apply:
- The merchant processes card-not-present transactions
- The merchant sells potentially high-risk goods or services
- The merchant has high average transactions or processing volume
Three Different Types of Reserves
Acquirers who demand a merchant account reserve typically apply one of three models for collecting and releasing funds:
Under this scheme, the acquirer withholds a small percentage of each transaction for a period of time (usually 6-12 months). Once that period passes, the acquirer will begin releasing the funds on a month-by-month basis. The rolling reserve is the most commonly-used method of collecting funds for a merchant reserve account.
The acquirer holds a percentage of every transaction until the reserve reaches a fixed amount (typically the equivalent of anywhere from two weeks to one month’s processing volume). With the reserve then capped, the acquirer will not withhold any additional funds. However, if the acquirer needs to withdraw money from the reserve, they can withdraw additional funds to cover the amount pulled.
The acquirer may ask the merchant to simply pay their reserve upfront before their agreement begins. This can be difficult for obvious reasons, but there are different forms in which the merchant may provide the funds, including a line of credit or a funds transfer, or the acquirer may simply withhold all of a merchant’s sales until they reach the threshold.
When Funds are Withheld Unexpectedly
Sometimes, an acquirer will implement an account reserve seemingly out of the clear blue. In reality, the acquirer has perceived an increase in risk and is taking precautionary action against liability.
The card networks each impose their own chargeback-to-transaction ratio limits, though in order to protect themselves, acquirers typically cancel a merchant’s account well before they breach that limit. When that happens, the acquirer will likely impose a revenue hold, meaning the merchant’s account will be frozen, and all of the funds in the account inaccessible.
If a merchant loses their account due to chargebacks, the acquirer will suspect that more chargebacks might come, as cardholders typically have as much as 120 days in which to file a chargeback. Therefore, even after the merchant’s account is closed, the acquirer will likely hold a large portion of the money in that account—at least enough to cover all transactions within the chargeback time limit.
What to Do About Revenue Holds
This is not illegal, nor is it considered unethical behavior. In most cases, the agreement signed with the merchant before they begin service actually guarantees acquirers the right to carry out this action.
Too often, merchants write-off revenue holds as a glitch or a payment delay until it’s too late. Rather, they should regard a revenue hold as a warning sign.
Merchants who believe they may be experiencing a revenue hold should contact their acquirer immediately. The merchant will still be expected to conduct business as normal, even without access to their funds, issuing refunds directly or through a third-party service.
Without swift and serious action, the merchant will probably lose their processing ability before the end of the month.
Contact us today if you’d like more information about merchant account reserves, minimizing risk, and ensuring longevity.