What is a Rolling Reserve in Payment Processing?
A rolling reserve is what some banks use to cover their exposure to risk on accounts that are deemed to have higher than normal risk. This is a standard requirement from every offshore bank, and many domestic high risk processors. It works as such: for every deposit that is made to you from your sales, the bank will typically hold back 5% to 10% of that deposit, and will hold that 5%-10% for a period of 6 months, after which it is released back to you. It is called a rolling reserve then, because the reserve held from Month 1 is paid back in Month 7, and the reserve held back in Month 2 is paid back in Month 8, and so on.
Rolling Reserve Merchant Account Details
A rolling reserve is a risk management strategy used by payment processors to protect against potential losses from chargebacks, disputes, and fraud. It involves withholding a percentage of a merchant’s credit card transaction revenue and holding it in a reserve account for a predetermined period. This withheld amount acts as a financial buffer for the payment processor or acquiring bank.
Here’s how it typically works:
- Percentage and Duration: The processor determines the percentage of daily sales to hold back and the length of time the funds are kept in reserve. For example, a processor might withhold 10% of all transactions for a rolling period of 180 days.
- Release of Funds: After the specified period, the funds in the reserve are released to the merchant, typically on a rolling basis. For example, funds withheld in January would be released in July, February’s in August, and so on, maintaining the continuity of the reserve.
- Purpose: The primary purpose is to cover any financial liabilities arising from chargebacks or fraud that occur after the transactions have been processed and before the customer disputes are settled. This is particularly common in industries considered to be high-risk due to their higher likelihood of chargebacks or fraud.
Rolling reserves are a standard requirement for new businesses, those with poor credit histories, or companies operating within high-risk industries. They are crucial for ensuring that the payment processor can cover unexpected liabilities without immediate financial damage to either party involved in the transaction process.
