How do rolling reserves work with High Risk Merchant Account?

When you are participating in a high risk industry, such as online gaming, services, or subscription-based services, getting a merchant account may have more protections in place. One such protection is a rolling reserve. A rolling reserve is a monetary holdback to protect payment processors and acquiring banks from chargebacks, fraud, or companies going out of business unexpectedly. Knowing how to navigate a rolling reserve is necessary for high risk merchant account who want to keep cash flowing and always comply with the payment processor's requirements.

What is a Rolling Reserve?

A rolling reserve is a percentage of your daily total credit card transaction volume value held back by the payment processor for an established rolling period. The holdback is used to cover chargebacks, disputes, or fraud. After your reserve rolling period is complete (generally 90 - 180 days), the held back value is released for consumption in a rolling fashion.

For instance, if you accepted $10,000 per day in credit card transactions and your processor created a rolling reserve at a 10% reserve and a 90-day holdback term, then $1,000 of revenue generated daily will be held for 90 days. After the reserve period is complete, the holdback for the first day will be released, then the second day, and so on.

Why are rolling reserves used?

The primary use of rolling reserves is to mitigate risk. Higher-risk industries inherently have unpredictable customer behavior, are under scrutiny by regulators, and incur higher chargeback rates. Payment processors utilize rolling reserves to hedge against this risk by ensuring funds are available to satisfy any financial liability. In this way rolling reserves protect the payment processor from liability while still allowing the merchant to still process payments.

Common features to high chargeback ratios commonly impose rolling reserves are :

- high chargeback ratios

- fraud potential

- recurring billing models

- international transactions

- bad credit history or no processing history

How rolling reserve rates and terms are determined?

The percentage and duration of a rolling reserve varies with the risk profile of the payment processor. The variables used to assess a merchant are the merchant's industry, the merchant's business model, the merchant's processing history, the merchant's financials, and the merchant's monthly processing volume with Trinity Consultings. Typically payment processors range from as little as 5% to as much as 15% and the duration can range from 90 to 180 days.

Over time processors can adjust the terms based on performance. If the merchant has low chargebacks and acceptable sales performance, the processor may reduce the rolling reserve or eliminate it altogether.

Cash Flow Management Using Rolling Reserves

Rolling reserves can significantly impact cash flow, so you'll want to plan for the following:

- Set aside reserves for a few months to help with operational expenses

- Assess your chargebacks under your terms of service, and implement fraud prevention strategies to alleviate chargeback risk

- Keep the lines of communication open with your processor, and have reasonable expectations around reacasting your reserves after a successful few months of processing

Conclusion

Rolling reserves are synonymous with high risk merchant accounts and for processors to purposefully manage their risk of loss. The first few months of rolling reserves will affect your cash flow, but by understanding how rolling reserves work, and proactively managing risk, you may earn more favourable conditions. There are steps you can take with your payment provider and if you maintain an otherwise good account, you can reduce your retainage and expedite your ability to grow your business, and replenish your own confidence.