What is a rolling reserve?

Not all merchants are required to have a rolling reserve merchant account. But for those that operate in particularly high risk sectors, or that experience a high number of chargebacks, maintaining a rolling reserve might be the only way they can open an account and start taking card payments.

As rolling reserves essentially confiscate a portion of your takings for a set period of time, you might be inclined to see them as a punishment. However, rolling reserve accounts play a vital role in payment processing, insulating providers from risk so that they can continue to offer their services to merchants like you with confidence.

In this article, we explain how rolling reserves work, how they compare to other types of reserve, which types of businesses need them, and their pros and cons.

What is a rolling reserve?

A rolling reserve is a percentage of a merchant’s gross sales withheld by a payment processor or merchant account provider to cover the cost of chargebacks or refunds over a particular period. The sum is returned to the merchant at the end of the reserve period.

The amount held for a rolling reserve is usually between 5 and 15% of turnover, depending on the provider and other factors. For riskier merchants, who are more likely to experience a higher volume of chargebacks or refunds, the percentage is usually greater.

Rolling reserves help payment processors protect themselves from losses by guaranteeing that there are liquid funds available to cover chargeback costs. That’s useful because, although the merchant is ultimately responsible for the chargeback, the processor is required to refund the cardholder immediately in the event of a successful dispute.

How does a rolling reserve work?

Under a rolling reserve contract, the processor holds a percentage of each transaction's total amount in a non-interest-bearing account for a specific period of time, typically between 30 and 180 days. The reason for this is that a cardholder usually has 120 days from the date of purchase to initiate a chargeback.

The rolling aspect refers to the continuous release of funds from the reserve account as individual transactions move beyond the reserve period window. For example, if you have a 10% rolling reserve for 180 days, and you process $1,000 in sales on day one, the processor will hold $100 in the reserve account. On day two, if you process an additional $500, the processor will add $50 to the account, bringing the total to $150. After 180 days, the reserve period has ended, and the reserve amounts are released gradually as new transactions are processed.

While it’s commonly thought that the processor will dip into the reserve account to repay chargebacks, that’s not the case. Chargeback repayments are actually debited from your merchant account. It’s only in the event that your merchant account is closed, possibly because of business failure, that the processor or bank would draw funds from the reserve account. The reserve account simply acts as an insurance policy for the processor.

Fixed reserve vs rolling reserve

For both a fixed and a rolling reserve agreement, an amount is withheld by the processor and placed into a reserve account. The main difference between a fixed reserve and a rolling reserve is in how your funds are withheld and released by the payment processor.

A fixed reserve is a set percentage of funds taken and held by the processor from each transaction until a specified release date. On that date, the full amount held in reserve is paid out to the merchant.

In contrast, a rolling reserve involves the gradual and ongoing release of funds, and the release schedule is based on a specific timeframe. As transactions move beyond the rolling window, they are released to the merchant, while the remaining portion continues to be reserved.

What type of business needs a rolling reserve merchant account?

There’s no law that mandates rolling reserves for credit card processing, and most businesses will never need to have a rolling reserve merchant account. However, if your business presents a sufficiently high risk to the processor, they may require you to maintain a reserve as a condition for opening an account.

But what constitutes high risk? You might need a rolling reserve merchant account if:

You operate in a high risk industry like gambling, foreign exchange, insurance, events - any sector where there’s a higher risk of chargebacks
You have a history of high chargeback rates
You’re a relatively new business with little credit history
You have a poor credit rating
You have long delivery windows for your goods or services (which increases the risk of disputes and chargebacks)

A rolling reserve doesn’t have to be a permanent feature of your account. If you can bring down your chargeback rate, or boost your chargeback score, your processor may see fit to lift your reserve requirement.

But if you are required to have a reserve, shop around and compare terms from different providers. You don’t want to be landed with a punishing contract that has a damaging impact on your cash flow.

How long are rolling reserves held for?

Rolling reserves are usually held between anything from 30 days to six months. This period depends on the provider you use, your risk level, business model, and the sector you operate in.

At the end of the reserve period, your funds will be released according to a pre-agreed schedule, which could be daily or monthly. For example, as in the above example, let’s say you have a 180 day rolling reserve and $100 was reserved on day one, and $50 on day two. If your contract stipulates daily payouts, on day 181, you’ll receive the $100 held on day one, and on day 182, you’ll receive the $50 held on day two, and so on and so on.

If you agree to monthly payouts, you’ll receive the monthly amount placed in your rolling reserve by the conclusion of each month 180 days later. So, if by the end of September, $1,000 had been reserved, the $1,000 would be returned to you at the end of March the following year.

What are the pros and cons of rolling reserves?

Here are the pros and cons of rolling reserves for merchants:

Pros

If you’re a high risk merchant, maintaining a rolling reserve might be the only way you can open a merchant account and accept card payments
It essentially acts as a compulsory savings account, which can help you get into good practices as you’re forced to put aside an amount that’s returned to you at a later date
It helps protect all parties involved in transactions by guaranteeing chargeback costs will be covered

Cons

A percentage of your funds being withheld for a definite period of time can restrict cash flow
Your processor has the right to withhold your funds for up to 180 days
Terms can be punishing for particularly high risk merchants

Capped vs up-front reserves

A capped reserve caps the amount that the processor can deposit in your reserve account. This fixed amount is usually based on a percentage of your monthly takings. For example, if a merchant has a fixed reserve of $500 or 10% of each transaction, that specific amount or percentage is withheld from every transaction until the reserve requirement is fulfilled. Unlike a rolling reserve, the amount isn’t released back to the merchant until the reserve account has been closed.

An up-front reserve requires the merchant to provide a lump sum of a pre-agreed amount to the processor at the start of the contract. This lump sum is typically a percentage of the anticipated transaction volume or a fixed amount based on the risk assessment of the merchant's business. Unlike a capped or rolling reserve, where funds are withheld from each transaction, the up-front reserve is held by the payment processor from the start of the merchant's relationship and then gradually released over time.

The up-front reserve provides immediate security to the payment processor but requires the merchant to have enough capital and cash flow to meet the reserve requirement. Because of this, up-front reserves are uncommon and most likely to be used for businesses that take advance payments or present a significantly high risk of chargebacks.