Merchant Account Cash Reserve

A merchant account cash reserve is defined as an amount set by the processing company to cover any chargebacks, returns, or extra fees.
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Merchant Account Cash Reserve

When a merchant account is created the processing company assesses the application and determines the risk level of the business. This level dictates the reserve.

The higher the risk, the larger the reserve the processor will use. The funds from this reserve go toward paying any unexpected fees. Whether those fees are chargebacks, returns, or other miscellaneous payments, the company keeps an escrow to ensure the funds are available.

Similar to other escrow accounts, this money is kept in a special account to be used for very specific scenarios. Technically, the money still belongs to the merchant.

However, the money stays in the escrow account unless it is needed.

If the merchant account is closed, the balance from the escrow account is paid back to the merchant. That is after it is ensured that no outstanding charges remain on the account.

The cash reserve is established in a couple of different ways. They can establish the reserve at the beginning of the contract through a one-time charge or by withholding a portion of each transaction.

Processing companies can also fill the reserve by retaining a percentage of each transaction for the life of the contract.

The last way the processors usually create the escrow account is to withhold a specified amount each month from the payout. After several months in the reserve, this is paid out. In this manner, the credit card processor always has several months in escrow to cover payouts.

Once the cash reserve reaches the threshold determined in the contract, the company generally drops the monthly charges or works in a manner to reduce the amount the business pays.

Most merchants will have a cash reserve. The size varies. For low risk businesses, the amount may be as little as a single month’s transaction amount.

However, for a high risk merchant account, this amount could cover 3-6 months of income.

All of these details are determined at the opening of the merchant account. The business is made aware of the amounts that will be coming out of their revenue stream to increase the balance of the cash reserve.

All of the information is part of what the business accepts when they sign the contract. In addition, they are told what the escrow account can and will be used for.

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