Posted on April 27, 2021 by Transcend Pay
Opening up a business without the ability to process credit card payments is a non-starter in almost any industry. Unfortunately, securing a merchant account from a reputable payment processor is often difficult for certain types of businesses. Many of them end up having to deal with burdensome merchant account reserves that cut into their revenue and limit their financial flexibility.
What is a Merchant Account Reserve?In order to understand how a merchant account reserve works, it’s helpful to review how payment processing works. When a customer pays for something by credit card, your payment processor issues your business a credit from the accepted translation. This amount is typically deposited within a few business days, but that isn’t necessarily the end of the transaction. That’s because customers can potentially dispute the translation and file a chargeback claim to receive a refund. Once a chargeback claim is investigated and found to have merit, the funds must be returned to the customer. But who covers those funds? While that responsibility technically falls to you as the merchant, the long delay between the initial payment and the chargeback claim often means that whatever funds you collected are no longer available. That puts the payment processor in a difficult position. In most instances, the merchant account provider will issue an immediate refund to the customer to avoid any liability, but they don’t want to issue a credit and then be stuck having to reclaim the amount from the merchant. Merchant account reserves bypass this problem by creating a cash reserve that the processor can use to cover the cost of chargebacks. In effect, they function like an Escrow fund or money down on a bank loan. These reserves protect the payment processor from risk by shifting anticipated costs onto merchants.
Account Reserves for High-Risk BusinessesProcessors typically require some form of merchant account reserve for any high-risk business account. The label of “high-risk merchant” can actually apply to a very broad range of businesses, many of which may not strike the average person as “risky” in the traditional sense. That’s because when banks and processors assess risk, they’re looking at the likelihood of either liability or the inability to recover credited funds. There are a few key characteristics that might get a merchant labeled as a high-risk business:
- You process a lot of online transactions (high fraud risk).
- You sell products or services that could be considered dangerous or highly regulated (such as firearms, tobacco, or adult products).
- Your average transaction amounts are high (high chargeback risk).
- You have a high volume of transactions each month (increased fraud risk).
- Your industry is historically known to have high chargeback ratios (such as travel, telemarketing, or dating services).