Reserve, which is also known as Rolling Reserve or even as Hold Back, is an amount of money that is literally held in reserve by the merchant account provider to cover potential customer dispute charges, related chargeback fees and other types of expenses. It is either taken from the revenue of a merchant’s credit card sales transactions or taken as an upfront fee. Credit card processing companies may request to hold this reserve in an escrow account.

Sometimes new merchants who have yet to establish their operations and earnings will automatically be required to pay an upfront reserve instead of a revenue-derived reserve. After a predetermined time set by the merchant bank had passed and a merchant performance minimum is reached, holdbacks are later returned to the merchant.

In the case of a rolling reserve, a reserve amount is held every month for a period of typically six or so months. On the following month the first month’s reserve is released back to the merchant, followed the next month by the second month’s reserve and so on, until the reserve is completely returned to the vendor altogether.

Merchants with solid credit and business history may typically meet the expectations of processors to cover returns and aren’t always made to retain a reserve account.

Reserve is a way for processors to ultimately lessen risk, and it is often necessary that businesses retain a reserve account at the sponsoring bank of the processor. This permits a processor to issue a hold on money in this account when a fraud detection has occurred or an unusually large return rate is rendered.

When a reserve is indeed required of a merchant to retain their account, the minimum reserve balance for the account is typically around twenty percent of the estimated processing volume. This amount can be determined from the track record of similar businesses or if the merchant has had the business before. New merchants are typically permitted to assemble their reserve by submitting transactions that are not withdrawn until the minimum reserve balance is realized. After that time, a merchant is permitted to withdraw the extra funds for transfer to their bank.

If a merchant isn’t able to pay a customer back or give them a new service or product, the merchant account provider is liable for the amount. If the merchant account provider isn’t able to pay the customer back then that business’s sponsor bank is accountable for the money. Sponsor banks typically are truly cautious with their underwriting, meaning they are very discriminating about who they allow to be merchant account providers, so this does not occur often. As a result, some merchant account providers actually subcontract from much bigger merchant account providers that also have chargeback risk.