High-Risk Merchant Accounts: Understanding Reserve Requirements 2025

Did you know that merchant reserves can significantly impact your cash flow and payment processing experience? In this episode, we dive into the world of reserves—what they are, the different types, and why banks may require them for your merchant account. We also share effective strategies to improve your reserve terms, even if you're operating in a high-risk industry. Join us as we demystify the purpose of reserves and empower you to navigate these essential financial tools.

In this episode, these questions and topics will be covered:
• 01:33 - Overview of merchant reserves: types, purposes, and how they're determined.
• 01:49 - What are reserves? An explanation of how banks manage risks like chargebacks and fraud.
• 03:50 - Types of reserves: Rolling reserves, static reserves, and upfront reserves explained.
• 06:59 - Factors influencing the type of reserve: industry, processing history, and bank risk tolerance.
• 15:05 - Debunking myths about reserves: understanding that they are not punitive measures.
• 18:58 - Understanding that reserves are typically not permanent and can improve over time with trust and good management.

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Transcript

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Hey, welcome to The Payments Guy, your ultimate guide to demystifying the confusing world of merchant payments. I'm Frank Senna, your host, a merchant payment specialist with nearly a decade of experience. In each episode, we'll break down the toughest challenges in the payment space so you can be better informed when navigating payments for your own business. From minimizing the impact of chargebacks, avoiding funding issues, and ensuring you're never stuck without the ability to process payments, we'll help you make smarter decisions Let's get started. Okay, imagine this. You're checking your merchant account balance, and after a great sales month, 10% of your funds are missing. It's locked away in something called a reserve. Why is this happening, and what can you do about it? Let's break it all down. Today, I'll explain reserves, the different types of reserves, and how banks decide whether a reserve is required for your merchant account, and strategies to improve your reserve terms. Welcome to The Payments Guy, where we make sense of payment processing for e-commerce merchants. I'm Frank Sena, and I've helped thousands of businesses navigate reserves, so I know how frustrating they can be. Let me help you avoid some common pitfalls and get back more of your hard earned money. Today, we're going to cover the purpose of reserves, what different kinds of reserves there are, how they are determined, and most importantly, how you can improve your reserve terms, even if you're in a high risk industry. So what are reserves and why do they exist? Reserves are a portion of your funds that are held by the bank to protect themselves from risks such as chargebacks, fraud, or sudden changes in your business that could affect their bottom line. So the key takeaway there is that it's your money, but the bank is legally allowed to hang on to it until they deem that there is no risk of loss for them. So from the bank's perspective, a reserve is a risk management lever. It's not about punishing you, the merchant. It's literally just about the bank watching out for themselves and making sure they don't take a loss as a result of going into business with you. So typically reserves are held for 180 days after the last transaction on on a merchant account has occurred because that covers the amount of time that a customer or a cardholder can create a dispute or a chargeback. So the bank is holding on to your reserve funds until the risk of chargebacks is completely gone. This policy does vary by bank and is always detailed in your merchant agreement. So it's important to read the fine print. I recommend having a tool like ChatGPT read your agreement for you and then tell you the terms. If you if you're like me and you have a hard time reading these legal agreements, I found that AI and ChatGPT can be a great tool for reading it, telling you what to look out for and helping you to understand the terms of your merchant agreement. So let's talk about the different types of reserves and who they affect. So first is a rolling reserve. You may have heard this term before. Basically, if you have a 10% rolling reserve, typically how this works is the funds are collected in the first month, the second month, the third month, the fourth month, the fifth month and the sixth month. So the bank has six months worth of funds held in the seventh month. They will release what they collected in the first month and they'll collect the 10% from that seventh month. So it's called a rolling reserve because After six months, they are refunding you from the oldest month and they are collecting 10% of the total volume that you processed for the current month. This is common in industries like travel, businesses that have a subscription billing model, or even merchants who have adult content. So if you have a 10% rolling reserve, the funds that the bank collected in January will be released to you in July when they collect the 10% of funds from July and put those into the reserve. So each month moving forward, the bank releases the funds collected six months earlier, and they will continue to collect that 10% indefinitely moving forward until you renegotiate the terms with the bank. So a second type of reserve is called a static reserve, and this is basically a fixed amount that is collected by the bank Every month they'll collect usually 10% until they reach this cap. So for example, on a$50,000 merchant account, you might have a$25,000 reserve, which means every month, 10% of your total volume processed will be withheld by the bank until$25,000 is collected. At that point, the bank will typically just hang on to that 25 K and stop collecting additional 10% moving forward. This is easier to plan for this type of reserve and is common for merchants with moderate to high risk. So the last type of reserve that we're going to cover which is kind of the worst I think is an upfront reserve. So merchants that a bank considers to be on the riskier end might be required to provide an upfront reserve where a lump sum is required from the merchant to be provided to the bank before processing begins. So, for example, they might say$15,000 upfront reserve is required, which means you, the merchant, literally have to wire$15,000 to this bank before you can even start collecting payments. This is common in businesses that have a negative option billing model, which is otherwise known as if you have like a free trial or a paid trial where the cardholder has to reach out to you to tell you to stop billing them. That's a negative option billing model. This could also be found for an emerging industry such as services for like an artificial intelligence based business. So the type of reserve you face is really going to depend on your industry, your processing history and the bank's risk tolerance and knowing which type of reserve is what will help you to be better informed. So let's talk about how how reserves are determined. Reserve terms are always determined during the underwriting process. A lot of times a merchant will ask me to find them a bank that does not require a reserve, but unfortunately that's not really how the process works. Once we submit an application to a merchant bank, the underwriting team will review your whole file and will assess the merchant's industry, the billing model of the business, what kind of cash that you have on hand, the credit score of the owner, any chargeback ratios, anything that's over the card network threshold of 1% of chargebacks will automatically categorize your business as high risk. Verticals like CBD, subscription billing models, and merchants who are startups, meaning that they do not have any prior processing history, are more likely to face reserves. Another common thing that we see with reserves is sometimes a bank will require a 100% reserve until certain requirements are met by the merchant. So what this means is the bank will hold on to 100% of the funds collected for a merchant until the merchant meets certain requirements. So the merchant is a to use the merchant account, but the bank says, okay, you can use it, but we're going to hold on to those funds until you make sure your website is compliant. So this could be something like adding a missing private privacy policy to the footer of your website. Or more commonly, what I've seen is for a subscription-based billing model, the bank will require that the merchant put very, very clear, explicit instructions on how a cardholder can cancel their subscription at the checkout page. And a lot of times the banks will say, okay, go ahead and use the account, but until you meet these requirements, we're not going to actually give you any of the money that you collect. This can be helpful for merchants who need to get up and running quickly, but it's really important that you meet these requirements in order to help the bank to feel comfortable enough to release the funds. Keep in mind that market conditions are also a big factor in determining a reserve Reserve policies can tighten during economic uncertainty. Again, a reserve is a lever that the risk team at the bank can use to help mitigate any risk of going into business with you. And the bank's risk tolerances do change over time. It really depends on market conditions and other things that might be happening with the card brand networks like Visa and MasterCard. So let's talk about some strategies to negotiate better terms. So before we even get approved for a merchant account, we always recommend to merchants that you show as much financial strength as possible. So for example, a lot of times a merchant who is just starting out might have a very low balance in their business bank account because they haven't done any business yet. So they just have a couple hundred dollars in there. So So as I mentioned earlier, your financial strength is one of the factors that an underwriter is going to consider when they are reviewing your application for a merchant account. If you've only got 30 bucks in your bank account, would you want to go into business with you? Probably not. So some ways to get around this are we can provide bank statements that are for the owner's personal account. It has to have the owner's name or be associated with the owner to be considered. We can even provide statements to your 401k, retirement accounts, investment accounts, anything that basically just shows that you do have cash to cover any losses. So by showing that financial strength, you're going to give the underwriting team more confidence that you will be able to pay your bills and cover any losses and that they don't need to assign a very strict reserve policy for account. Another thing is if you're the business owner and your credit score is not strong, that's typically under 650, then that is going to be a factor that might result in more strict or less desirable reserve terms for you, the merchant. So a tactic that you can use is to add a cosigner who has excellent credit to the merchant account application. Now, this will require that that cosigner does have liability if your business is mismanaged and gets a lot of chargebacks, but it will also allow you to ensure that the underwriting team feels more confident going into business with you is a good idea. So having a cosigner can be a great way if you don't have strong credit to show the underwriting team that, hey, we do have someone on board who pays their bills and who can be held accountable if this account goes under. So typically after establishing processing history for three to six months with a merchant bank, we can then go back to the bank and say, Hey guys, now that you've gotten to know this merchant and how their business works, can you consider reducing the reserve to 5% or zero? We can ask them to cap the reserve and say, okay, why don't you just hold on to whatever it is that you've already collected and stop collecting it? additional reserve funds at this point. Um, or sometimes we can even say, Hey, look, the merchant has had no charge backs and, um, there's no issues here. So I don't think this reserve is required. Can you please reconsider and review this merchant's account and reduce it, um, in order to have a bank. Um, or a risk team review your reserve terms will need to provide updated financials. So we'll need your most recent for three to six months. months, business bank statements, and again, the personal bank statements or investment accounts or whatever it is to show that you have liquidity and you have some cash to cover any overages. That is how we can help to negotiate getting your reserve terms to be more favorable for you. We always recommend for all high-risk merchants, and if you're listening to this, you're probably a high-risk merchant, that you invest in fraud prevention tools and chargeback management services. These are invaluable as you You guys may know the underwriting process and trying to get a merchant account application approved can take a long time and can be very thorough. So it's a lot of work and you don't want to risk losing that merchant account for something that could have been preventable. So it's important that you sign up with chargeback mitigation companies or get set up with rapid dispute resolution, which is a technology that will automatically refund customers if they dispute a charge that's under a certain amount of value. The key takeaway here is that it's all about building trust with your bank partner. The more that you prove the risk of loss to the bank is low, the more likely banks are to adjust those reserve terms to be more favorable for you as the merchant. So let's talk about a couple of misconceptions about reserves. A lot of times, merchants will take it personally Personally, that a reserve is required and they get really angry and they, they feel like it is so unjust and it's like something that this underwriter has it out for them. But really it's, it's not like that. It's business. You guys have to understand from the merchant banks perspective, this reserve is a way of protecting the bank from loss. They don't want to go into business with a merchant who is maybe going to mismanage their business or have a lot of issues and end up costing the money. They want to make money just like you do. So you have to understand from their perspective, the reserve is a way that they can guard against losing money if they decide to go into business with you and work with you and collect payments for you. So understanding this will help you to approach negotiating these reserves a little more effectively when we try to get the reserve terms to be a little bit more favorable. And also at the initial initial approval process. Don't get angry. Let's find solutions. Like I said, let's find some more financials to show your business is financially strong and has some liquidity to cover losses. And maybe then we can push back and get a better, more favorable reserve assigned to your account. So the next thing that I wanted to cover is a misconception is that merchants have the ability or the right to demand changes to a reserve term. Unfortunately, that's not how this works. The bank assigns a reserve based upon their total risk analysis. And again, they're looking at your credit, they're looking at your financials, they're looking at your billing model, your website, they're looking at your processing history, and they have a risk formula that allows them to determine whether or not they want to approve a merchant for a merchant account and what the terms of that approval are going to be. So you can't negotiate the reserves but we can influence the decisions and sometimes we can push back with strong documentation and by performing well over time and establishing good history with that bank so unfortunately you don't get to call the shots when it comes to a reserve we do have some ability in certain situations to help ensure that that reserve is more favorable for you but for the most part it's there for a reason and just asking them not to put it there isn't going to change their mind. It's there based on logic and data and this whole risk formula. So here's some key takeaways. Reserves are about risk management. They're not about punishment. They're not punitive. They're not there because the underwriter has it out for you. They're there because the underwriter wants to protect their bank from any losses. There are different types of reserves, which are all determined during the underwriting process. There's a rolling reserve, a static reserve, and an upfront reserve. And this will all be determined during underwriting based on your risk profile and the risk tolerance of the bank. Again, that risk tolerance changes over time as market conditions change. So another takeaway guys is strong financials are key in helping to secure better reserve terms. Um, in addition, once you're live, you have to ensure that you're getting minimal chargebacks. This is going to help you to be empowered to negotiate better reserve terms down the road. So we recommend working with some of our partners for chargeback mitigation and rapid dispute resolution. Now, keep in mind, in most situations, reserves are not permanent. And with time and trust, you can work with the bank to make the reserve terms more favorable. There are certain industries where it is required for every merchant based on their industry type or their billing model. But for the most part, it can be renegotiated. So if reserves are affecting your cash flow, reach out to PayDiverse. That's my company. We've helped countless merchants to improve their business operations and secure better terms for their reserves. Visit PayDiverse.com or email support at PayDiverse.com for a consultation or a rate review. Let's optimize your payment processing together and help you perform stronger and help your business make money. Thanks. Have a great day.