What Is a Rolling Reserve and How Does it Affect You?
A rolling reserve is a strategy used by banks to shield themselves and the merchant from possible financial loss due to chargebacks from the customer. A portion of the funds are collected via credit card and secured by the bank from the merchant’s account to minimize the risk of potential chargebacks.
The rolling reserve amount is calculated by the acquiring bank (hence why this blog post is covering what an acquiring bank is). This calculation is made based upon the amount of each transaction the merchant completes. The bank then decides the amount of time in which the rolling reserves are held, and the acquiring bank will release the rolling reserve funds once the account is closed.
Essentially, your business will be set up to have a rolling reserve for the life of your business unless you change payment processors, in which case, the bank will return your reserves within 6 months to a year.
The purpose of a rolling reserve is to act as a mighty financial shield for the banks. The riskier the type of business you are in, the higher the rolling reserve will be. The reserve protects the bank by making sure there is enough money in the merchant account at any given time to handle any chargebacks that may occur. This money remains in reserve for the life of the merchant account.
Rolling reserves are typically imposed upon high risk merchants because these businesses themselves are high risk, so the bank has to find some way to lower the risk of losing money.
A business can find itself in the high risk category if they have one or all of the following:
- Past processing history with excessive chargebacks
- Risky business models such as subscription services, adult industries, tobacco and vape, travel, and more
- Large ticket prices
- High processing volume
- If the owner has bad credit
Here’s a common scenario – let’s say you have a subscription box business selling vape E-juice and hardware. Every month your customers get great vape and e-cigarette related products delivered to their door. Your customers love the convenience of this service and you are making a profit. You are on top of the world. Your bank, however, is shaking in their boots because they know that having a subscription service is a great way to incur an excessive amount of chargebacks – especially when the customer billing is recurrently.
To avoid the risk of losing money, the bank imposes a 7% rolling reserve on your account for 18 months. The payment processor will hold 7% of your sales and transactions and you will not have access to this money until your account is closed – unless you are given an otherwise specified date by the bank.
How is your business affected by a rolling reserve?
Well, for one thing, a rolling reserve can almost always hurt your access to cash flow, making it difficult for you to compete in your industry. It can also mean that your net profit and available funds cannot be used for marketing for added value purchases. This kind of scenario can seriously stunt your company’s growth. So keep in mind that if you make the decision to go into a high risk industry, be prepared for high risk costs, and a rolling reserve is definitely one of them.