As you shop around for a high-risk merchant account service provider, you’ll find that processors typically require businesses to set up a reserve. Think of the reserve as a monetary cushion that insulates the processor from the risk that comes with many chargebacks and other problems that require a refund to the consumer. Here’s a closer look at two types of reserves: capped and upfront reserve. As you will see, there are pros and cons to each one.
Image via Flickr by 401(K) 2013
For a capped reserve, the processor retains some percentage of each transaction. Depending on the terms of the high-risk processing merchant account agreement, it usually ranges from 5 to 15 percent. The processor determines how much it needs to secure for the reserve (the cap), and once the money in the reserve meets that threshold, the processor stops pulling a percentage of each transaction. In most cases, the reserve equals half the monthly payment volume. However, processors may require a full month’s volume when they feel the risk is high enough to warrant it.
With an up-front reserve, the processor requires a deposit of the total amount of the reserve before initiating high-risk merchant account services. Usually, the anticipated monthly volume of credit card payments helps the processor decide the amount of the reserve.
While the upfront reserve requirement sounds like a high hurdle for business owners, it usually isn’t, because they have three ways to comply. The easiest option is to wire money to the processor to cover the reserve amount. If outright payment isn’t possible, then the business can provide a bank letter demonstrating that it has enough credit to cover the reserve. As a last resort, the processor can retain all transactions until there’s enough to cover the reserve.
On the plus side, the capped reserve requirement doesn’t involve an upfront financial commitment. It is also a temporary arrangement that pulls a small percentage of each transaction only until the processor can fully fund the reserve.
One of the upsides of an upfront reserve is that it gives you options to avoid having the processor withhold money from payments you receive. If you must allow the processor to put all credit card payments toward the reserve obligation, at least you know it’s short-term, and you’ll start receiving payments once the reserve is met.
As for drawbacks, a capped reserve prevents you from receiving all the money from every sale. There’s the same concern with an unpaid upfront reserve, but it’s a bit more serious because the processor keeps the full amount of payments until the reserve is met.
Processors that offer high-risk merchant accounts decide how long they need to keep a reserve. A reserve requirement may last through the life of the contract for businesses that entail more risk. When risk is relatively low or temporary due to seasonal fluctuations in volume or other factors, the processor may require the reserve only for a finite period.
Even though the money in a reserve belongs to the merchant, it’s an important tool that processors use to mitigate their risk.