Rolling Reserve - Merchant Account Reserve

A rolling reserve is applied to an otherwise unacceptable merchant account by a merchant service provider to lessen the risk associated with the account, making it possible for the provider to underwrite the account.

A rolling reserve allows a credit card processor to withhold a pre-specified percentage of gross sales from the merchant. The provider deposits the held funds in to a non-interest bearing account for a pre-determined period of time that is specified in the merchant processing agreement (MAP).

For Example:

If a merchant account has a 5% rolling reserve for 18 months, the processor will withhold 5% of the merchant's gross sales in a non-interest bearing account. The 5% of sales that are withheld will not be accessible to the merchant for a year and a half.

A rolling reserve will only affect credit card sales for Visa and MasterCard transactions, unless other card providers specifically call for a reserve as well on their individual processing agreements. For example, if an authorized merchant service provider for VISA and MasterCard require a rolling reserve, the same reserve would not apply to American Express and Discover transactions.

Rolling reserves are one of the more harsh restrictions that a provider can place on a new merchant account. Unlike an ACH delay, a rolling reserve can have a serious, and long-lasting adverse affect on the cash flow of a new business.

The underwriters at the third-party processor, aggregator, or acquiring bank are responsible for requesting rolling reserves for a high-risk merchant account. There are a number of variables that can make an account fall into a high-risk category, such as:

• Large Average Tickets
• High Processing Volume
• High-Risk Merchants & Business Types
• Business Owners With Poor Personal Credit

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Negative affects of a rolling reserve on your business

The affect that a rolling reserve will have on a business is directly proportional to the amount of gross sales accounted for with Visa and MasterCard for that business.
Below is an example of how a 5% rolling reserve would affect two distinctly different business types.

A gross sales chart for a retail business may look something like this:

• Cash Sales 50%
• Check Sales 15%
• American Express 5%
• Discover 10%
• Visa & MasterCard 20%

 

Visa and MasterCard sales for this business only account for 20% of gross sales, therefore lessening the affects that a 5% rolling reserve would have on the overall cash flow for the business.

A gross sales chart for an online business may look something like this:

• Cash Sales 1%
• Check Sales 5%
• American Express 10%
• Discover 15%
• Visa & MasterCard 69%

Visa and MasterCard sales for this business account for a sizable 69% of gross sales, therefore magnifying the negative affects that a 5% rolling reserve would have on the overall cash flow for the business.

Cash Flow - Before agreeing to a rolling reserve you should seriously consider the affect that the withheld funds will have on the cash flow of your business. Make sure that you will have enough NET profit from credit card sales to pay for merchandise and operating expenses after the 5% reserve.

Competitive Capabilities - A rolling reserve will cut into your profits and make it even harder for you to compete in a low-price market. If your target market is price sensitive a rolling reserve may be out of the question.

Growth - Having funds withheld by a provider will leave less money available for working capitol. Less working capitol will translate in to slower business growth.

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Positive affects of a rolling reserve on your business

Well, positive really isn't the best word to use in this case. There is nothing too positive about another company holding 5% of your gross credit card sales for up to a year. However, rolling reserves do serve a purpose. They make it possible for providers to grant merchant accounts to businesses that otherwise may not be able to get one. This day in age, almost all businesses need to accept credit cards in order to stay competitive, even if they will need a rolling reserve attached to their account to make card acceptance possible. Rolling reserves are eventually released, and the merchant can go on processing normally.

Will a rolling reserve hurt my business?

Use the information above to examine how a reserve will affect your business and ask yourself:

Do I have a high percentage of Visa and MasterCard Sales?

Will my mark-up allow for a rolling reserve?

Can I stay competitive with a rolling reserve?

The answers to the above merchant account questions will tell you if your business will be adversely affected by a rolling reserve.

Questions & Comments

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On September 30, 2009 Steve said:

would a merchant processor accept a letter of credit from my bank in lieu of a rolling reserve?

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On October 2, 2009 Ben said:

Hello Steve,

It's possible, but not likely. Rolling reserves are ordered by the underwriting department at an acquiring bank if deemed necessary by a risk assessment. The assessment is based on a number of factors besides just the personal credit standing of the principal applying for the merchant account.

Business type, age, processing volume requested and more all have an impact on the risk associated with an individual merchant account. A combination of factors may be causing the underwriter to call for a rolling reserve on your account, and eliminating one may or may not help.

Another option is to look elsewhere for a merchant account. Acquirers have varying levels of risk tolerance and some will allow an account without a rolling reserve that another may not even accept.