Within the Merchant Services and Payments Industry the terms most often used when underwriting Higher Risk and Harder to Place Merchant Accounts are called a Holdback, Reserve or Rolling Reserve.
Holback’s, Up Fronts & Rollings Reserves
Processors are often inclined to request the above due to various risk factors most likely attributed to a business type and business model. Additionally, the credit worthiness of either the business itself or the business owner applying for a Merchant Account will come into question. If so, the Sponsoring Bank and Payment Processor will decide to mitigate their Risk Exposure by asking for any of the above. They will usually do this by asking for an Up Front Deposit or will Hold Back a certain percentage of sales income generated by credit and debit cards to cover any possible disputes that might occur due to the various risk factors assessed when provisionally approving the Merchant Account.
Most Higher Risk Accounts will start out this way for an undetermined period of time, usually 6-18 months while the Merchant is able to display and prove how they intend on running their Business. The Merchant needs to show the Bank that they with help insure they do all that they can to consciously prevent any disputes or chargeback from arising due to the perceived Risk initially imposed by some of the above referenced variables.
Once the merchant has established a proven track record and has been able to prove themselves worthy in the eyes of the bank and processor, the holdback or reserve is returned to the merchant either partially or in whole. Banks rarely ever pay interest on this money, and it’s never available for a business to use during the initial holdback period.
The Fine Print-Holdback
If you are negotiating a contract for a merchant account and are obligated to this reserve in order to get approval, it’s always a good idea to investigate the terms and conditions as best as you can before signing on the dotted line.
Make sure and always pay special attention to the reserve policy as outlined in the merchant service providers addendum or within the terms of their agreement. You want to make absolutely sure that you understand the percentages deducted and time frame you will be subjected to the deductions. Always ask the difficult questions before you sign up to help make sure there are no surprises once you are up and running with your account.
If your Business is currently involved with a Holback, Reserve of Rolling Reserve of any kind, it’s best to make sure and understand the best business practices needed to prevent fraud and chargebacks. Only by applying these best practices will your business thrive in today’s fast paced digital environment.
Ask one of our Business Specialists at SecureGlobalPay on what best practices to implement for your specific Business needs.