A fixed reserve is an amount of money a credit card processor temporarily withholds from a merchant. The purpose of a fixed reserve is to mitigate financial risks to the processor.
Credit card processors assume a certain amount of risk any time they agree to process for a merchant. The merchant might engage in fraud or illegal activity, receive a high number of chargebacks, or fail to pay their monthly statements.
There are several different tools that credit card processing companies use to control their risk. Any time they approve a higher-risk account, they may use one or more of these tools. One example is placing a reserve on the account.
Two common types of reserves are rolling and fixed reserves. With a rolling reserve, the processor holds a percentage of the merchant’s monthly deposits. Each month while the reserve is in effect, they continue to hold the agreed-upon percentage. After a specific period of time, such as six months, they begin releasing those funds.
With a fixed reserve, the processor can take the full deposit amount from the merchant up front and release it after the reserve period is over. This type of fixed reserve is sometimes called an up-front reserve. They can also take a percentage each month until the full reserve amount is reached.
The difference from a rolling reserve is that the processor doesn’t hold and gradually release funds. Instead, they release all of the funds after the merchant has proven that they are processing safely.
During boarding, the merchant and credit card processor will agree on the fixed reserve terms. The reserve period is usually at least six months and up to a year or more. During this period, the merchant will need to keep their chargeback percentage low and meet other requirements.
If a merchant doesn’t meet the reserve terms, the processor has a few options. They may increase the amount of the reserve, extend the reserve timeframe, or close the account. They’ll also keep the reserved funds to cover disputed transaction amounts, fees, and other potential issues.
If your processor suggests a fixed reserve, it’s because there is some risk associated with your account. This might be due to your business model or industry. Perhaps your average transaction amount or monthly volume is particularly high. Or, maybe your business credit history is poor.
By setting up a fixed reserve, a processor can work with you while mitigating their own risk.
Before agreeing to a reserve, make sure you understand the details. Don’t sign a contract if the terms aren’t acceptable to you.
There are two options for fixed reserves. One is setting up the reserve up front. The other is building up to it over a period of several months.
The amount you process will dictate the amount of the reserve. This is so the processor can cover any chargebacks or other issues related to your specific account.
If you process $100,000 per month, your processor might want to set up a fixed reserve of $50,000. If you agree to an up-front reserve, they’ll hold 100% of your transactions until that amount is reached. Then, you can begin processing as usual.
Otherwise, the processor will hold a certain amount, such as 10%, from each batch you process. Once the $50,000 is reached, which will take five months, they will stop withholding additional funds.
Your funds will remain in an account for a specified period, such as six months to a year. Once you process for that amount of time without any issues, your processor will release your funds.« Back to Glossary Index
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