Man handing cashier credit card

What business owners need to know about rolling reserve accounts

9 min read
Erik Deckers

The information provided in this blog is for informational purposes only and should not be considered as legal or accounting advice from GoDaddy. Always consult an attorney or accounting professional regarding your specific situation.

Rolling reserve accounts are both a boon and a bane to the entrepreneur accepting credit cards. Both a benefit and a pain. A blessing and a curse.

Any entrepreneur that takes credit cards, especially if you're a high-risk merchant, deals with rolling reserves. It's the merchant service provider's way of protecting themselves against chargebacks.

The downside is that the service provider is protecting themselves with your money.

As much of a pain as rolling reserve accounts are, they can also protect you from friendly fraud, malicious fraud, and chargebacks both malicious and deserved. If you're ever hit with a surprise chargeback, you won’t have to dip into your cash flow to handle it.

The issue becomes whether this protection is too painful for you to bear.

This article will show you:

  1. What is a rolling reserve account?
  2. How can a business benefit from rolling reserves?
  3. Are there businesses that won't benefit from rolling reserves?

Let's get started!

What is a rolling reserve account?

A rolling reserve account is a sub-account that's attached to your merchant services account. It's usually part of your contract with your merchant service provider (MSP; also called a payment service provider), the company that processes your credit card payments. This could be your bank, a third-party provider, or an MSP that specializes in high-risk merchant accounts.

(It's this last group that's more likely to require a rolling reserve account, since most banks won't handle high-risk merchant accounts, to begin with.)

A portion of your credit card sales is placed in the sub-account as a way to cover any chargebacks that are filed against you. And if you're a high-risk merchant, you're already at risk of being hit with chargebacks, which is why it's rare for low-risk merchants to have a rolling reserve.

Rolling reserve accounts exist because customers typically have 120 days from the date of their purchase to actually issue a chargeback.

The idea is you don't want your regular cash flow to be dinged by the reserve, so the account saves you from interrupting a slow month or getting hit with an unusually high fee.

When a chargeback is issued, the bank will give the merchant a short time to respond, usually just a few days. You can dispute the chargeback or just grant the refund. And if you don't respond, the bank will automatically grant the refund plus hit you with a lot of extra fees.

To fund the rolling reserve account, your MSP takes some of your money from each Visa or Mastercard* sale — 5 to 10% of each credit card transaction — and puts it into the account, but you don't actually have access to it. The MSP can hold it for as long as six months, depending on the rules they set out for the account.

*The rolling reserve applies only to Visa or Mastercard because American Express and Discover don't have rolling reserve accounts. Debit cards also don't trigger rolling reserves.

Here's the rolling part

Person holding a credit card while working on laptop

Each month, your funds are released into your account every month, but only after a certain period of time. If you have a 120-day rolling reserve, then your reserve will be released four months after the initial month it's collected in.

Let's say you have $10,000 in Visa and Mastercard sales in August, and you have a rolling reserve rate of 7.5%. By the end of August, $750 has been placed in your rolling reserve account. You have the same sales for September, October and November, with the same amount of money placed into your reserve.

On Dec. 29, 120 days after Aug. 31, your August funds will be released into your account, and it will finally be yours. And on Jan. 28, 120 days after Sept. 30, your September funds will be released into your account. And so on and so on.

The account is rolling because funds are always coming out even as they're going in. But the length of the "roll" will be up to the discretion of the payment services provider, anywhere from three to six months. So when deciding on a merchant service provider, be sure to ask them if they require a rolling reserve account for high-risk merchants, and how long the reserve is for.

If a service provider wants a rolling reserve and you're considered low-risk, don't sign with them.

There are plenty of other providers who don't require rolling reserves for their low-risk merchants.

Related: What’s the difference between a high-risk and low-risk merchant account?

Other types of reserve accounts

There are two other types of reserve accounts that your payment services provider might want to put you in instead.

Capped reserves: Your reserve is capped at a percentage of each month's transactions, usually 50 to 100% of your total monthly volume. They take 5 to 10% of each month's transactions until they reach that capped number. Then nothing else is withheld after that, but the money remains in the account for the duration of the merchant service agreement.

Upfront reserves: You fully fund your reserve before you ever start processing credit cards. Think of it as a prepaid reserve account. You can pre-fund the account with money from another account. Or you can get a letter of credit from your bank to fund it. Or the MSP can withhold 100% of your early transactions until you reach your limit, then nothing else is withheld.

In both types of accounts, you have to replace each chargeback, however.

How can a business benefit from rolling reserves?

Person making credit card payment at Point of Sale system

Like we explained, low-risk merchants usually don't have rolling reserves, because they're typically not at risk of being hit with chargebacks. It's the high-risk merchants — subscription services, coffee shops, hotels, travel providers, ecommerce merchants — that have to deal with reserves. It's especially true for industries that are unregulated or under-regulated.

In other words, if your business is the kind of business to get hit with chargebacks, you may appreciate the protection of the rolling reserve account.

Here's an example:

Let's say you sell a subscription service that you bill annually. Your customers pay $200 per year for the service, and it lasts for 365 days. What you may not have realized is that many times, customers have 120 days from the time the service ends to issue a chargeback on their purchase.

That doesn't seem like a big deal. You make a purchase online, you have 120 days from that purchase to make the chargeback.

But with the subscription service, the customer has 120 days after the service ends, which is one full year after the actual purchase date.

So on Aug. 1, 2020, I subscribed to your software app. On July 31, 2021, the subscription ended. I have until Nov. 28, 2021, to request a chargeback from my bank, which they are likely to grant, assuming I meet all the requirements to earn the chargeback.

Your rolling reserve account will cover the chargeback cost if the bank actually decides to give it to me.

And this is where the rolling reserve comes in handy. My $200 chargeback doesn't dip into your regular cash flow, which is good, because maybe you were having a rough November, and that would have been a huge hit to your cash flow. The rolling reserve protected you, even though it's been a pain to keep funded in the past.

Are there businesses that won't benefit from rolling reserves?

Some businesses won't benefit from rolling reserves, but these are businesses that operate on such thin margins and have issues around cash flow.

If you operate on a 5 to 10% margin, it does you absolutely no good to lose your entire margin to your rolling reserve. If this is your situation, you may want to look at accepting other forms of payment, like checks, ACH, or even money transfers via Apple Wallet, Venmo or PayPal.

Other businesses that won't benefit from rolling reserves are low-risk merchants that normally don't get hit with chargebacks in the first place.

If you're in the B2B (business-to-business) realm, selling things like replacement parts for manufacturing machines, you probably don't get hit with any chargebacks. If that's the case, you certainly don't need a reserve, because you're most likely considered a low-risk merchant. If your MSP wants to charge you one, go find a new MSP.

Are payment gateways viable alternatives to traditional payment services providers?

Some people think payment gateways give you a workaround to dealing with rolling reserve accounts or being tagged as a high-risk merchant.

This is an option if you're a high-risk merchant, but it's not something I would recommend for low-risk merchants, because the providers have been reclassifying a lot of low-risk merchants as "risky sellers," when they're not actually that risky. They may fall into that category, but they don't have a history of chargebacks.

For example, The New York Times wrote in June 2020 about how Square was withholding as much as 30% of transactions equalling thousands of dollars for each business, including web developers, contractors, legal services companies, and other small businesses that were low-volume, low-risk merchants.

Bottom line: 30% of your credit card transactions is a lot of money, especially if they're also handling your American Express and Discover transactions. If you can't take the financial hit, consider other options.

Next steps

If you're looking for a merchant service provider, whether you're a high-risk or low-risk merchant, be sure to ask your provider about any rolling reserve accounts you might be required to maintain. Ask them how much they'll deduct from your account, and whether you can fund it from another source, such as a letter of credit from your bank.

Finally, make sure you do everything you can to reduce your chargebacks so you don't lose so much money to extra fees, or to surprise losses from unscrupulous customers.

Looking for a payment services provider? Give GoDaddy Payments a good look.

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