What is a Rolling Reserve in Payment Processing?

A simple business transaction takes place between you and a customer. When you’re selling items with cash, they hand you cash, you hand them the item, and both parties walk away happy.

When you’re accepting means of payment other than cash, you need a payment processor to handle it. Your payment processor validates the transaction, takes the money from the customer, and gives it to you.

What happens, then, if the customer disputes the charge? Maybe it’s friendly fraud, maybe it’s actual fraud, maybe it’s just dissatisfaction.

Under normal circumstances, you can issue a refund. If you refuse, though, the customer might dispute the charge with their bank, who forwards that dispute to the payment processor. The payment processor then has to deal with a chargeback; they have to give the money to the bank, and then they have to get the money back from you.

Because this is a hassle, payment processors charge fees for these chargebacks. And because it’s a major hassle if there are more than just a few chargebacks, if your chargeback rate gets too high, the payment processor might start adding more restrictions and more fees to your account.

Among the many possible penalties a payment process can put on your merchant account is the rolling reserve. Though, in some ways, is it even a penalty? Understanding the rolling reserve and how it works can be more beneficial than you might think.

What is a Rolling Reserve?

First, let’s get right to the definition.

A rolling reserve is sort of like escrow for your business transactions. When you sell products and process transactions, your payment processor handles payments, but rather than simply put the money from the transactions into your account, they hold on to (some of) it.

The primary purpose of the rolling reserve is as an insurance policy against your inability to pay them back in the event of a chargeback. If a customer disputes a charge and a chargeback is processed, you have to pay the payment processor to compensate them for paying the customer’s bank back. But, if you can’t pay, such as if your account is closed or your business folds, the reserve is there so they can cover it.

How long they hold onto the money is the duration of the rolling reserve. A six-month rolling reserve means that the payment processor will hold onto the funds for six months, releasing it at the start of the seventh; so transactions processed in January are paid to you in July, transactions from February are given to you in August, on a rolling basis. The amount they hold onto can vary, but is usually between 5% and 15%.

The payment processor doesn’t do anything with this money except hold it. It’s their guarantee that, if they have to process a chargeback, they can do so without having to claw funds back from a failed business. They can just pull from the reserve.

A rolling reserve is not the only kind of reserve, either. Some payment processors prefer to work with static reserves. A static reserve is a fixed amount of money that is held as a buffer, as a cost of setting up the account. It may be held indefinitely (until you cancel your account), or until a certain condition like a sufficient number of successful transactions is met, before being released back to you.

How Does a Rolling Reserve Work?

A rolling reserve might be something the payment processor requires you to set up when you sign up, or it might be something they require you to start if your chargeback ratio reaches 1% or higher. In cases where the reserve is required, it’s usually because your business is considered high risk.

Either way, they will provide you with the terms. They will tell you what percentage of your funds they will hold, which could be small or large, depending on various factors. They will also tell you how long they will hold the funds, which is generally 6-12 months, again depending on business factors. In some cases, they can be as short as 30 days.

In cases where the reserve is related to a chargeback percentage, there may also be terms for removing the reserve; if you successfully combat fraud enough to bring your chargeback percentage down to normal levels, the reserve can be released in full.

Are you still charged fees for chargebacks if you have a rolling reserve?

Yes.

A common misconception is that the reserve is used to pay back chargebacks, and you just receive the funds you would get, less the chargeback amount, when it rolls over.

This isn’t the case; a chargeback is still charged to your accounts when it happens, along with any fees the payment processor levies against you because of it. The reserve exists in case you can’t pay for that chargeback and fee.

Who Needs a Rolling Reserve?

Rolling reserves are generally applied to businesses that have problems with financial solvency.

The obvious target is high-risk businesses. Any business in an industry with statistically high chargeback rates, such as:

• Travel
• Adult Entertainment
• Gambling
• Subscription Services
• Cannabis
• Pharmaceuticals
• Cryptocurrency
• Telemarketing

These industries tend to have higher than normal chargeback rates. Thus, to protect themselves, payment processors implement rolling reserves on any account that signs up to be a merchant for one of these industries.

There are other reasons why you might be required to set up a rolling reserve other than being part of a high-risk industry, however.

New businesses, especially from new business owners with no credit, bad credit, or no real track record, may need to set up a reserve. It might be a static reserve, or a rolling reserve, but either way it’s insurance for the payment processors in case your business rapidly fails. They don’t want to process a bunch of payments, have your business disappear, and be left holding the bag if chargebacks ensue.

Rolling reserves may also be required for businesses that do high volumes of lower value transactions. These kinds of businesses are often the target of card verification scams, so a reserve helps protect against that kind of abuse.

Are There Drawbacks to Rolling Reserves?

Certainly.

For one thing, a rolling reserve affects your day to day and week to week cash flow. For businesses that are just starting out or operating on thin margins, you may rely on the initial profits to reinvest in the business and keep the business going. A reserve puts a significant damper on that, and may make it more difficult to remain financially viable without external investments.

A rolling reserve may also be a penalty, which can be sudden and cause a disruption with future development plans, again related to cash flow. If you anticipated a certain amount of income, that income less 5-15% may be difficult to work with, especially if you’ve made long-term commitments and need that money.

Rolling reserves also have the disadvantage of being variable, compared to static reserves or no reserves. When you don’t know how much business you’ll be doing from month to month, you don’t know how much money will be withheld.

It’s one thing if you go into business knowing you’ll need a reserve, such as when you’re in a high-risk industry. It’s quite another if you have a reserve suddenly imposed upon you because you had a few too many chargebacks in a quarter.

Are There Benefits of a Rolling Reserve?

Sort of. When you’re learning about rolling reserves, you’ll often find guides that run down the pros and cons, and they list pros such as:

• It serves as a de facto savings account, forcing you to set aside money for unexpected circumstances.
• It helps build trust in your business with your financial institution.
• It helps protect you against chargebacks.

The fact is, none of these are really true. A rolling reserve isn’t something you set up, it’s something imposed on you. It doesn’t serve as a savings account and the funds stored in it don’t accrue interest for you; you would be better off having your own pseudo-reserve in an actual savings account.

Similarly, it doesn’t really help you build trust with the payment processors, because it’s only imposed on you if you’ve lost that trust. The exception to this is new businesses that have a reserve until they’ve proven themselves, but that’s not the majority of reserves.

And, as mentioned, a reserve doesn’t protect you against chargebacks; it protects the payment processor in case you can’t pay for chargebacks. You have to use anti-fraud tools to protect yourself from chargebacks.

There’s really only one benefit to a rolling reserve, and it’s the ability to have a merchant account at all. Without the reserve, your payment processor could instead simply cancel your account when chargebacks get too high, or decline to offer an account at all if your business is deemed high risk.

Can a Rolling Reserve be Terminated?

Yes, though the circumstances vary. It’s more likely for them to be reduced and for a portion of your reserve to be reduced or partially released.

If your business is in a high-risk industry and you’re required to have a reserve to open your merchant account, there’s a good chance you will not be able to terminate the reserve in any way other than terminating your account entirely. You may be able to negotiate better terms on your reserve (a smaller percentage, a shorter rolling window, etc.) after you prove yourself, but you are unlikely to be able to get rid of it entirely.

If your business was not high risk until you had a few bad months and ended up above the 1% chargeback ratio threshold, and a reserve was imposed on you, you can often get it terminated by demonstrating effective anti-fraud measures. Bringing your business back down out of high-risk territory will allow you to return to lower fees, smoother operations, and no reserve.

With a rolling reserve, termination of the reserve usually means the payment processor stops withholding funds moving forward. They will still release the remaining funds on a rolling basis as normal, but the reserve will stop being funded along the way.

Ways to Handle a Rolling Reserve

If your business is required to maintain a rolling reserve, either temporarily or indefinitely, there are some things you can do to try to manage it.

Plan around the loss of cash flow. The terms of the reserve are clearly stated to you, so you will know how much of each transaction will be withheld, and if there will be a cap on the maximum amount the reserve can hold. You can, thus, plan around this reduction in cash flow. If you’re setting up a reserve alongside your merchant account, you may also be able to adjust your prices to account for this cut off the top and maintain daily cash flow despite the reserve.

Accept other kinds of payments. Like chargebacks themselves, a rolling reserve is limited to transactions processed from credit cards. If you are able to process other forms of payment, whether it’s cash and ACH, cryptocurrency, or buy now pay later services, these aren’t susceptible to chargebacks the same way and aren’t affected by the need to hold a reserve.

Use anti-fraud tools. Whether you use the tools provided to you by your payment processor, or third-party tools in addition, you want to take action to cut down on chargebacks and fraud. There are a lot of different ways to do this, so examine the transactions that result in chargebacks and figure out how to stop them.

Use FightDisputes.com. My service sits between your customers and your payment processor. When a customer submits a dispute, we detect it and notify you before it reaches your payment processor. You can then reach out to the customer and offer a refund or other customer service instead; if they accept, the dispute can be canceled, and a chargeback never happens. This way, you can help keep your chargeback ratio low, your merchant account low-risk, and your reserve low or eliminated.

If you can avoid having to carry a rolling reserve, it’s worthwhile to do so, whatever set of actions you need to take to avoid it.