A holdback is another term for a reserve. It refers to an amount of money that a credit card processor holds to mitigate risk when boarding a merchant account.
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What Is A Holdback?

A holdback is another term for a reserve. It refers to an amount of money that a credit card processor holds to mitigate risk when boarding a merchant account.

Holdback Explained

Within the credit card processing industry, a holdback is much more commonly referred to as a reserve. Credit card processors use reserves as a tool to mitigate risk to themselves, merchants, and sponsor banks. Processors may choose to place a reserve anytime they open an account for a merchant they consider risky.

Business models that are considered high risk may include:

  • Free trial offers followed by automatic charges
  • Supplements and pharmaceuticals
  • Merchants who use aggressive marketing tactics

When a holdback or reserve is in place, the processor holds some of the merchant’s funds. Instead of depositing all of the business’s funds into their account, the processor places them into a reserve account. Merchants agree to the terms of the reserve when they sign their contract.

If necessary, the processor can use the held funds if something goes wrong. Issues that may arise include chargebacks and the merchant unexpectedly closing their account or failing to pay their monthly fees.

If there are no issues for the timeframe outlined in the contract, the processor will release the funds.

Two common types of holdbacks, or reserves, are rolling and fixed. We’ll describe each in more detail in the example section below.

Holdback Examples

A common holdback, or reserve, amount is 10%. If your business processes $100,000 per month, your processor may agree to a rolling reserve of 10%.

For each batch you process, the processor will pay you 90%. Overall, you’ll receive $90,000 out of the $100,000 you process for the month. After the first rolling reserve period ends, the merchant will release the other $10,000. This period could be six months. The processor will then hold another 10% out of the following month’s batch.

The process of holding and releasing funds gradually is why this method is called a rolling reserve.

After a specific timeframe, if there aren’t any issues, the processor will release all of your held funds. The reserve time depends on the overall risk involved and may be a year or more. Before you sign your contract, the processor will describe the terms of the reserve. Make sure you understand how the reserve works before you sign.

With a fixed reserve, the processor doesn’t periodically release funds. Instead, they hold a certain amount up front. You can either pay this amount when you open your account or build up to it.

If your fixed reserve amount is $60,000, you can reach this amount by allowing your processor to hold 100% of your transactions. After that, you’ll receive all of your payments as usual. After you process successfully for the timeframe outlined in your contract, the processor will release your funds. This type of reserve is also called an up-front reserve.

The other option is to build up to the $60,000 reserve. Your processor can hold 10% of the $100,000 you process each month. After six months, your reserve will be complete. Then, if there aren’t any issues with your account, your funds will be released.

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