What is a reserve account?
For merchants in higher-risk verticals (nutraceuticals, subscription billing , etc), many banks will require a reserve account to off-set the risk to the bank. To fund the account, a percentage of every batch will be deposited into the reserve account. Processing fees, refunds and chargebacks are deducted from your business checking account, not the reserve account. Funds are only deducted from the reserve account if your business is closed and the bank is unable to pull these liabilities from your checking account.
A typical reserve requirement might be 10% for 6-months on a rolling basis. This would mean that 10% of your gross credit card processing for today (Nov 18, 2019) would be held in the reserve account for 6 months and then released back to you on Monday May 18, 2020. Unless your business folds and you close your checking account, your reserves will remain intact. Reserves can be a hit to cashflow, but… can they be a savings account too?
There are variations in the reserve requirement, which vary from bank to bank and merchant to merchant. Some banks may ‘cap’ the merchant account at a specific amount. For example, you may have a reserve cap requirement of $50,000. When your reserve account reaches that cap amount, reserves are no longer pulled out of your batches. Other banks may require a reserve up front, before allowing the merchant to process credit cards, for merchants viewed as particularly high risk.
For merchants with particularly slim margins, the reserve requirement can be a burden and needs to be considered when calculating cash flow and budgeting. However, when you hit that 6-month point and reserves start returning to your account, the burden eases and reserve releases can be helpful in managing cash flow.
When do I get my reserves back?
If your reserve is a rolling reserve, you’ll start to see some funds released from your reserve account into your checking account at the end of the rolling period. As part of your monthly accounting, you should be keeping tabs on your reserves for your merchant account, how much was processed and put into reserves each month. Keep a running record of your reserve deductions. Be prepared and know how much is in your reserve account. If you are unsure of your reserve balance, your processor’s risk department can provide you with your current reserve balance.
Can I eliminate my reserve requirement?
It is possible to remove your reserve requirement with some proven track history. Around 90 days after your first sale, most risk departments will consider reducing your reserve requirement. To get there, your chargeback ratio and chargeback counts need to be in good shape. To request a reserve reduction, your chargeback ratio should be below 1% and your chargeback counts (number of monthly chargebacks) should be under 30, depending on your volume. To request an adjustment to your reserve requirement, you need to know your numbers. See below (Reserve releases) for the math behind reserve requirements.
As the saying goes, there’s more than one way to skin a cat. As opposed to having your reserve requirement reduced from 10% to, let’s say 5%, you could ask your bank to cap your reserve. If you request a capped reserve, expect the cap to be roughly equal to your monthly volume. This does lock up some capital indefinitely, however it eliminates the monthly grind of having reserves pulled from your batches.
As for eliminating your reserve requirement, expect to show your bank’s risk department 12 months of solid history before requesting to have your reserve requirement eliminated. The better option may be to request that your reserves are capped. If you hit a rough patch, with a month or two with abnormally high chargebacks due to unforseen circumstances, your bank may have more patience in dealing with the temporary spike in chargebacks if you have a well funded reserve account.
My batch was moved into reserves, what does that mean?
Occasionally, your bank’s risk department may move additional funds into your reserve account. Usually this happens when a particularly large batch is processed (i.e. a batch over the weekend, which includes multiple days of processing). Usually the batch is held, while the risk department runs an inquiry. When the risk department sees an anomaly like this, they may hold the batch and then move it into the reserve account.
Reserve releases.
You may need to request your reserves to be released, if your bank hasn’t started releasing reserves, or, if your merchant account was closed. The following is a step by step guide for requesting reserve releases.
- First, find the current reserve balance. An authorized contact from a company representative (usually the company owner) will need to make the request with your processor’s risk department.
- Double check the reported reserve amount with the sales volume processed on your merchant account to verify that the amount is correct. If there is a significant variation (+/- 5%), contact the risk department.
- Next, calculate the number of chargebacks you had during the past 6 months. You can find your chargeback counts on your monthly statements.
- Now, calculate the amount of risk on that merchant account: 6 month’s net sales (gross sales – returns) x (chargeback % + refund %).
- You’ll probably find it easier to request multiple releases, rather than requesting the full reserve balance to be released. To succeed in getting a reserve release, you need to provide justification and data. Don’t just ask the risk department to release your reserves. Ask for a specific amount and show the supporting math. Some processors will request a notarized reserve release request, so be prepared.
- If your merchant account was closed, expect to wait until 6 months after your last sale to request a reserve release. Although, you may be able to request a partial release before the 6-month mark. If your MID or bank account is closed, you will need to provide a new bank letter with the new account information.
While the reserve requirement may place additional burdens on you as a merchant, it can be manageable. By tracking your reserves each month, and keeping your chargebacks low, you put yourself into the best position possible down the road. Know what the bank’s risk exposure is, using the math in this article, and request releases and modifications to your reserve requirement as you build history and credibility with the bank. When managed well, your reserve account can be used to support your relationship with the bank, offset mid-term cashflow short-falls and can help even the un-disciplined business owner be disciplined about saving.