A rolling reserve with an offshore merchant account is a guarantee. A domestic merchant account with a rolling reserve, however, can be somewhat of a gray area. Rolling reserves, in general, are imposed upon a high risk merchant to allow the acquiring bank to safely manage the risk of offering payment processing services.
There are several definitive reasons a domestic acquiring bank may do so – each bank has its own logic and standards. But generally, the terms of a rolling reserve are centered around the degree of risk a merchant may carry.
3 reasons merchants incur a rolling reserve with a domestic merchant account
The unwritten rule No. 1 of high risk merchant services states that banks will protect themselves, rightfully. Below are three circumstances your domestic merchant account will come with a rolling reserve:
- Startup businesses: Every payment service provider is hoping to process payments for the next Zappos, the next Etsy or the next startup that is going explode in popularity. Both Zappos and Etsy were once startups and considered risky because of that. The risk comes from the fact that a startup business lacks payment processing history, which raises red flags with acquiring banks. In lieu of processing history, an acquiring bank will ask for other KYC documents such as a startup merchant’s personal credit history, personal bank reference letter and a detailed business plan among other documents. And, of course, a rolling reserve can be expected.
- Low capital: One element that enhances a merchant’s chances of earning a domestic merchant account, simply, is having money in the bank. When a business is judged not to have an adequate amount of capital behind it, it increases the risk level for acquiring banks. Not enough capital leaves the bank to wonder what recourse the business has if it falls into a period of stagnancy and/or less-than-healthy volume. Having healthy finances is like having a safety net. What does the merchant have to protect itself? Without a safety net, the acquiring bank will likely impose a rolling reserve.
- Imperfect or bad credit: We’ve long blogged about how a merchant’s payment processing history (preferably solid) is probably the most important factor in obtaining a merchant account. When a high risk merchant approaches a bank or a payment processor about a domestic merchant account, usually one of the first questions to follow is about payment processing history. Right away, the acquiring bank of payment processor can gauge the degree of risk the merchant may pose. If the merchant’s processing history is less than adequate, the merchant can expect to pay into a rolling reserve, usually for six months.
The good news: With healthy processing, reserves are (largely) returned
With healthy processing history, a merchant will likely receive all or the majority of their rolling reserve in due course. We caution, however, that the return of a rolling reserve takes time, since chargebacks can occur as long as six months after a purchase.
Generally, acquiring banks are strategical about how they release reserves to merchants. Releases of merchant reserves begins only after the merchant account contract reaches an end. Then, six months later — when the possibilities of a chargeback have expired — a large percentage is released. Another large percentage is released at 12 months after the end of the contract, usually followed by the remainder at 18 months.
Again, every bank is different, but this is the most common release method we see.
Domestic merchant account rolling reserve is an opportunity
We often receive inquiries from high risk merchants who have had their merchant accounts shut down or who fit the description of the above — startup, low capital and imperfect credit. A rolling reserve shouldn’t be seen as a penalty to a merchant, but more so another chance to build credit and solid processing history. Once a high risk merchant can get through the initial six months of a rolling reserve without incident, s/he is well on their way to restoring themselves to sound credit and processing.
With a 10 minute conversation, Instabill domestic merchant account managers can discuss the possibilities with you one-to-one. Call Instabill direct at 800-530-2444.
