Merchant Account Reserve- All you need to know

6 min readFeb 16, 2023

Suraj is an online merchant dealing with fabrics and threads. Mrs. Rampal, a local wedding boutique owner, placed a huge order for silk threads with Suraj online. The order was delivered on time, and a month later, Mrs. Rampal finds out that there are some damaged silk threads within the box.

She immediately demands a chargeback from her bank, which credits her account and intimates Suraj’s bank for reimbursement. Unfortunately, Suraj’s account doesn’t have enough funds to cover the reimbursement, so his merchant reserve account is debited to cover the chargeback cost.

What is Merchant Account Reserve?
A Merchant Account Reserve is a deposit that every merchant pays to the acquiring bank to cover potential losses arising from chargebacks.

This is a common scenario that happens every day to merchants across the country and the world. In fact, this account is a ballpark estimate set by every acquirer to cover the potential losses that arise from a chargeback. And based on the risk presented by the merchant, the acquirer sets the reserve amount. In the case of a high-risk merchant, this reserve will be set at a higher limit.

How does a Merchant Reserve Account work?

Merchant Account Reserve is generally agreed upon when the merchant enters into a service agreement with the acquirer bank for processing debit and credit card transactions. The fund for this reserve is often paid up front by the merchant. If not, they can also offer a letter of credit issued by their banker or the acquirer will withhold transaction deposits until the reserve amount is met.

Types of Reserve Accounts:

As detailed above, the acquirer offers the following types of reserve account variations to merchants based on their business nature and the risk involved.

Rolling Reserve:

Rolling reserve is the most commonly offered reserve type by acquirers. As the name states, this reserve will be in constant motion of collecting and releasing funds. Usually, the acquirer will hold back a percentage of every card transaction, daily settlement, or monthly balance, say within 5–20% for a period of 6–12 months.

The agreed percentage would remain constant provided the merchant’s risk factor has not increased within the holding period. And post the hold, the acquirer will slowly release the accumulated funds to the merchant’s general account as new funds are added to the account.

Unlike capped or up-front reserve, rolling reserve is not static by nature. They grow in volume as the business grows. So, acquirers prefer this type of reserve as it offers them higher protection against any unforeseeable future losses.

Capped Reserve:

A capped reserve is a static reserve that is gradually funded by each transaction until the minimum threshold is met. And akin to a rolling reserve, the capped reserve is funded by a percentage of the daily settlement or monthly balance.

But there is a fundamental difference between a capped reserve and a rolling reserve. The acquirer will only hold back funds of the sales volume until the cap limit is reached. Usually, it is 50% of the monthly sales volume.

For example, if the capped reserve is fixed at $10,000, the acquirer will hold back a fixed percentage of daily settlements or monthly balance until the cap is met. Once the limit is fulfilled, the acquirer will no longer hold back funds.

This cap limit will remain constant as long as the merchant holds the account with the acquirer.

Up-front Reserve:

Also known as the "minimum reserve," the "up-front reserve" is a fully paid escrow account. This reserve must be paid upfront by the merchant to the acquirer even before the processing of credit/debit card transactions.

An up-front reserve is most often applicable to merchants who have little or no processing history for the acquirer to bank on. There are three ways in which a merchant can fund an up-front reserve;

Initiate a transfer from a different account to the merchant account reserve account
Obtain a credit line or loan to fund the account
Agree to the terms that the acquirer will hold 100% of the revenue till the reserve threshold is satisfied.

Also, the merchant’s industry and business model are taken into account when deciding the up-front reserve limit.

Other than these standard reserve accounts, processors may have their own rules and regulations for a reserve account. For example, PayPal rolling reserve accounts, Stripe reserve accounts; and so on. These processors might have additional unique brand requirements for merchants to fulfill.

Usually, these reserves are held by the acquirer only for a few months during the initial period, but for a high-risk merchant, they are held indefinitely or until the account is amicably closed.

Who is a high-risk merchant?

In a general sense, a high-risk merchant is one who experiences a high volume of chargebacks due to the nature of the industry or service they provide. Along with this, there are also certain other factors that qualify a merchant as high-risk;

Low or absent credit score
They follow a free trial-based sales model
Has no prior debit or credit card processing history
They deal in products that can be considered a reputational risk to the bank
They deal in industries where consumer complaints or regulatory oversight is common.
They have a documented history of high chargebacks
Delay in service of product delivery
Large ticket purchases are common.

Even with these reasons in place, a merchant is categorized as high risk based on their incoming volume of chargebacks and their failure to respond in time to them. This action leads to a higher chargeback ratio, which in turn translates to higher merchant account reserves and fees.

These merchants often maintain a reserve until the day they close the account with the acquirer. The acquirer will set the reserve limit and will further increase or decrease the same by analyzing the merchant’s transaction and chargeback patterns.

Is it possible for a high-risk merchant to lower their risk status?

Yes, it is possible. To date, chargeback intimation to the merchant from the acquirer happens via manual processes of excel sheets, email, or phone call. This in turn leads to missed opportunities to refute the chargeback claim and increased fees, claims, and chargeback ratio.

Often, the merchant remains unaware of the protocols, like presenting compelling evidence that proves the transaction is legitimate within the time limit. Coupled with the redundant manual processes, the merchant takes a massive hit on their reputation and revenue.

But with our Unified Dispute Management (UDM), financial institutions and payment aggregators/gateways can inform and empower their merchants to respond to chargeback claims on time. In fact, responding to these claims instantly actually helps the merchant to lower their risk status from "high-risk" to "medium- or low-risk."

UDM sends out timely notifications to merchants via their preferred channel of communication (phone/email/WhatsApp) to fight these claims. That’s not all, UDM is also ODR compliant and powered by AI to efficiently handle disputes and chargeback claims.

Get in touch with us today to know more about UDM and how it can help your merchants regulate, tailor and modernize their chargeback process and responses.