By now you may or may not have heard about the mounting rumors of Square arbitrarily placing 30% reserves (also known as a rolling reserve) on processing amounts of select merchants. You may have in fact been one of those merchants. Their recent move has created a lot of noise in the payment processing industry.

Square‘s auto approval process with reverse underwriting procedures have long been a catalyst for their success. So why now? Why the sudden change?

Well there are a lot of factors that play into this. Traditionally speaking, Square does not dabble in what many processors see as high risk merchant accounts. Plainly, they steer clear of business types that are considered to be unsavory, have regulatory requirements or have the risk of high chargeback ratios.

When and why are reserves typically put in place by processors? A reserve is used as a safety net for the payment processor that is taking on the liability of processing for the business owner. What is a common reason for a reserve? It can be due to poor credit, poor previous processing history or involvement in an industry where chargebacks are common (such as subscription services or for tech support).  Typically, the reserve is agreed upon and set up during the initial approval of the merchant account. In some instances, a reserve can be added later as needed to help mitigate the potential risk to the processor. The most important thing to know about a reserve is that the money still belongs to the merchant. Think of it as an escrow account for possible disputes and chargebacks down the road.

The processor will hold those funds in an escrow account, and should there be any chargebacks that the business cannot afford to pay, then they would come out of the reserve amount held in escrow. A standard reserve is set up with a percentage and a dollar amount for a ceiling of what the processor will hold.  For example, if a merchant has a 10% reserve with a cap of $10,000, then 10% of all sales will be deposited into the reserve account until the $10,000 amount in reserve is reached.  Once that limit is reached, then 100% of sales going forward will be credited to the merchant’s bank account.

 

What happens to a reserve after termination of a merchant account?

This can play out in a couple of ways.  Normally, after termination of a merchant processing account with the processor, there is a 120 to 210 day window that the funds in reserve are held before they are released back to the merchant. If chargebacks are initiated after the account termination (but before release of the funds held in reserve), the chargeback amounts will be deducted from the reserve account. Once that 120 to 210 day term has ended, the processor will release funds back to the merchant’s bank account.

 

Can a reserve be released while a merchant account is still active?

The answer will vary by processor and will solely depend on the merchant’s processing history.  The merchant may have the opportunity to have a reserve reviewed for a partial release or a reduction, but there will need to be adequate processing history prior to making that request. Six months of processing history with a processor would be a good starting point.

 

Why is Square holding a reserve now? 

Square has claimed that the new reserve is due to COVID-19 related issues, which may or may not be the entire reason. 

 

What should merchants do if Square wants to hold 30% of their funds in reserve?

Luckily for most merchants, Square is not the only option. The industry standard reserve for a high-risk merchant is 10-20%.  We rarely see a 30% reserve request even in today’s business climate.

 

Contact Flow Payments today for a free quote and a lower reserve program than you are being forced into by Square. As a leader in the high risk payment processing space, we look forward to exceeding your expectations.