How Account Reserves Affect High Risk Merchants

In order to accept credit cards, a business must first open a merchant account with an “acquiring bank.”  This is far easier for some merchants than for others because some merchants are deemed to present a higher degree of financial risk to the acquirer based on factors such as the potential for chargebacks, uncollected fees, Card Brand fines, fiscal mismanagement, and other account-related incidents. Naturally, acquiring banks are hesitant to open merchant accounts for “high risk” merchants without a mechanism in place to mitigate the associated risks – to wit, the merchant account reserve.

Which Merchants Are “High Risk”?

Whether a merchant is “high risk” is determined by the acquirer on a case-by-case basis, and the criteria vary depending on the particular acquiring bank’s underwriting policies. Most acquiring banks consider merchants operating in industries with high chargeback rates to be high risk, which includes merchants that operate primarily online and conduct little-to-none of their business transactions face-to-face with consumers. Many online subscription-based services, e-commerce websites, and business with high sales volumes fit the profile.

An acquiring bank may also review the track record of the business applying for the merchant account, as well as the background of the merchant’s owner(s) or principal(s). Businesses may be high risk by virtue of operating internationally, or because they had a merchant account terminated in the past. The owner/principal’s personal credit history may also influence a bank’s decision to require a merchant reserve.

What Do Merchant Account Reserves Mean to High Risk Merchants?

If you are a high risk merchant, you should anticipate being required to post reserves as a condition to opening a merchant account.

Merchant account reserves operate similarly to escrow accounts – funds belonging to a merchant are held by the bank in reserve, inaccessible to the merchant, and may be used by the account provider to cover losses when the funds in the merchant account are insufficient to do so. The amount held in reserve is often a percentage of the merchant’s monthly transaction processing volume, and the method of funding the reserve depends on the type of reserve required by the account provider.

There are three types of merchant reserve accounts.  The most common is the “rolling reserve”: a fixed percentage of every cleared transaction that results in a merchant account deposit is placed in the merchant reserve account for a certain amount of time.  A “capped reserve” similarly requires a percentage of each deposit resulting from a cleared transaction be held in reserve up to a predetermined amount – the cap. Finally, “upfront reserves” require an upfront payment of the reserve amount. This upfront payment may be made by wiring the reserve amount from the merchant’s checking account, providing a letter of credit from the merchant’s own bank, or by agreeing to deposit 100 percent of cleared transactions into the merchant reserve until the reserve amount is met.

The question of merchant account reserves may play a big role in how you choose your merchant account. If you are a merchant looking to open a merchant account, consider whether you will be deemed “high risk,” and whether the amount and type of merchant account reserves demanded by the acquirer fit your business.