Merchant Reserves: Total Asset Protection

When starting a business, there is always that risk of something not going entirely as planned. For this reason, Merchant Account Providers and Acquiring Banks retain a non-interest-bearing reserve fund to protect themselves and issuing banks from financial catastrophes suffered by merchants. Some merchants may be unaware of this reserve and become unsettled when a reserve deposit is required or their processing funds are being withheld. This can be especially true of new businesses that are operating entirely on the previous month's profits. In this article, we will discuss exactly what this reserve fund is, how it is used and why it is important, as well as how it benefits Merchant Account Providers and merchants alike.

The reserve fund works fundamentally the same way as a security deposit on an apartment. In case something goes wrong and the tenant is unable to pay for certain damages, that money is used to pay those expenses. In the business world, the same is true; if a Merchant Account Provider is facing financial losses due to undesirable events surrounding a merchant, the reserve fund is used to cover those costs.

It should be stated, for the record, that reserve funds are by no means a sign of mistrust between Merchant Account Providers and merchants. They are simply a guarantee of security for the fulfillment of a merchant's individual obligations to the Merchant Account Provider and the Acquiring Bank. There are many unforeseen circumstances in the business world – excessive chargebacks, unexpected expenses, mismanagement, sudden drops in sales, natural disasters, non-delivery exposure and the like. We all hope these things never happen; however, Merchant Account Providers need to be protected from undesirable merchant processing performances beyond their control. Reserve clauses can be found in most merchant processing agreements.

The reserve funds themselves can be collected in different ways. In most cases the reserve account is to be funded in full at the time the merchant agreement is signed. Some Merchant Account Providers may allow a rolling reserve, where a certain percentage will be taken from the merchant's transaction activity until the reserve fund has reached an amount predetermined in the agreement. The actual amount of the reserve varies by merchant, as well as the amount of risk the Merchant Account Provider carries with processing credit card transactions for this merchant. In most cases the amount of the reserve is related to specific industry return percentages, chargebacks, current volume and anticipated volume. At any time, the Merchant Account Provider or the Acquiring Bank may increase the reserve amount required based on exposure and risk of the individual account.

Merchant Account Providers and Acquiring Banks are not the only ones who benefit from requiring a reserve account. Reserve funds create a security bond between merchants and Merchant Account Providers so that when financial troubles do arise, there is no uncertainty as to who pays for what, and there are no bills to collect. The reserve fund has already been collected, so the Merchant Account Provider does not run the risk of taking a financial hit as the result of merchant losses.

If a merchant's processing agreement is terminated by either party, the remaining amount of the reserve is returned to the merchant. Typically, the Merchant Account Provider will hold the reserve funds for a period of 3-6 months. Most banks will not retain reserves more than one year after the last transaction, except in cases where goods or services are obtained beyond the one year period. This is to allow chargebacks and refunds to be processed for the merchant's most recent transaction activity. Once the risk is no longer a liability, the reserve funds are returned.

In summary, merchant reserves act as a fallback mechanism for Merchant Account Providers and Acquiring Banks, to be used when merchants encounter a worst-case scenario and are unable to pay the amounts due as described in their Merchant Processing Agreement. This process carries extra security to the merchant agreement and protects all parties involved from losing money due to merchants' inability to cover processing expenses. Merchants can have peace of mind knowing that in most scenarios their ending debt to the Merchant Account Provider is already paid off. For everyone involved, the merchant reserve fund is something that is kept with very good justification.