Rolling reserve is an important aspect in the world of finance and business for stability and sustainability.
Among the different tools that help in managing financial risk, the concept of rolling reserves stands out.
This article will explain what rolling reserves are, why they are important, how they work, and the benefits derived from them.
We will also explore how the rolling reserve differs from other types of reserves, such as fixed or static reserves, and the process for terminating a rolling reserve.
What is a Rolling Reserve?
A rolling reserve is a policy employed by merchant account providers for safety against chargebacks.
The most common purpose of a rolling reserve is as a financial security measure within the payment processing industry to protect against prospective losses, fraud, or other financial risks.
It is a certain percentage of the transaction revenue obtained by a merchant, which must be reserved by a payment processor or an acquiring bank.
This reserve is not available for immediate use by the said merchant and is usually released after a fixed period.
Normally, this happens within a set timeframe, usually 90 to 180 days. The term “rolling” describes the dynamic nature of the reserve.
Each time a new batch of transactions is processed, part of the revenue derived from those transactions is added to the reserve, while older parts of the reserve are released to the merchant.
It is almost like a continuous circle where the reserve is constantly replenished and released, hence the term “rolling.”
Read about: How To Open a Merchant Account: Step-By-Step Guide
Why Are Rolling Reserves Important?
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Risk Mitigation
The major function of a rolling reserve is the mitigation of risk for both the payment processor and the acquiring bank.
This means that in case some portion of a merchant’s revenue is kept in reserve, respective institutions will be insulated against possible losses emanating from chargebacks, fraud, and other financial risks.
This becomes paramount in industries with a high likelihood of chargebacks, such as e-commerce, travel, and subscription-based services.
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Financial Stability
The positive side of rolling reserves is increasing the financial stability of the entire payment ecosystem.
Ensuring losses are covered in case of fraudulent transactions.
This type of rolling reserve ensures integrity in the system of payment processing, which plays to the benefit of the merchant through better security and reliability of his payments processed.
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Merchant Accountability
Another major benefit is its financial accountability with merchants.
Rolling reserves mean holding a certain percentage of the earnings a merchant generates, which keeps merchants on their toes by offering better service and quality goods to their clients.
The merchant reduces risks with the occurrence of chargebacks that cost the processing company money.
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Insolvency Protection
In a merchant’s bankruptcy or closure, the rolling reserve acts as his financial buffer with which to safeguard any outstanding chargebacks or possible liabilities.
For the protection to be extended on both ends–the payment processor and the bank acquiring the proceeds–and assurance that customers would be well-taken care of, too:
How Do Rolling Reserves Work?
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Creation of Reserve
It comes in the form of an agreement between a retailer and their respective payment processor during such time when an account was created, mentioning therein the specifications of the rolling reserve.
This is usually deducted as a certain percentage range of 5 to 10% is the common rate of the transaction revenues accrued daily or monthly.
Of course, how much percent exactly and over how much time will depend on the specific risk a merchant poses.
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Accumulation of Funds
In the process, the merchant has a certain percentage of every transaction revenue that goes to the rolling reserve.
For example, if the percentage reserve is 10%, then 10% of each transaction revenue is held in the reserve.
Usually, these funds are held in a separate account and are unavailable for the merchant until such time as the period of the reserve has expired.
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Release of Funds
The rolling reserve is just that-rolling. It means that as new transactions come in, older portions of the reserve are released to the merchant.
For example, if the reserve period is 180 days, then funds held in reserve 180 days ago will be released to the merchant, while new funds from recent transactions will be added to the reserve.
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Adjustments to the Reserve
The terms of the rolling reserve change over time according to performance and risk.
If the merchant has a continuous history of very low chargebacks and minimum risk, the payment processor may lessen the percentage reserve or shorten the period the reserve will be held.
Whereas if the merchant’s risk profile increases, the percent and period are extended.
Rolling Reserves vs. Fixed Reserves and Static Reserves
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Fixed Reserves
A fixed reserve is some set amount of money reserved for a certain duration of time.
Unlike the rolling reserve, which keeps filling up and expiring, a fixed reserve is kept the same during the period of the reserve.
In cases where the risk involved can be estimated pretty well since its nature is to a reasonable extent defined and predictable, fixed reserves are used accordingly.
For example, construction projects, or at times major events.
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Static Reserves
A static reserve, like a fixed reserve, would imply that an amount of funds are held in a reserve.
The difference, however, is a static reserve usually deals with low-level or stable risk situations-such as traditional banking or insurance.
Static reserves are not dynamically adjusted as rolling reserves are and can be held for a longer period.
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The major difference between rolling reserves and fixed or static reserves is that the former are dynamic.
While the rolling reserve adjusts to the change in the risk profile of a merchant business, fixed and static do not; they are somewhat rigid and less responsive to changes in risk.
Rolling reserves apply better to those industries that experience much volatility and uncertainty, where the risk of chargebacks and fraud is considered to be in constant flux.
Benefits of Rolling Reserves
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Improved Risk Management
Rolling reserves are a good mechanism for financial risk management.
In this way, payment processors can protect themselves from potential losses by constantly readjusting the reserve according to the merchant’s volume of transactions and risk profile.
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Improved Cash Flow Management
The impact of rolling reserves would be improved cash flow management by merchants since the release of money becomes predictable and regular.
During the initial period, the reserve holds part of the merchant’s revenues. However, since the reserve is rolling, funds are regularly freed.
This enables the merchant to better align their finances with proper planning and budgeting.
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Trust and Credibility
The acquiring bank and payment processors will, therefore, consider the merchants on whom the rolling reserves had been imposed to be more reliable and trustworthy.
It follows that with the lifting of the rolling reserve requirement, the terms and conditions are friendlier for the merchants, plus a variation in payment processing services.
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Protection against Chargebacks
The rolling reserve also works as a buffer to financial burdens for the processing of chargebacks and disputes.
Both parties are sheltered from a probable financial strike, which often rises to tremendous figures in certain high-risk activities.
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Flexibility and Adaptability
By nature, the rolling reserve has room to be more flexible and responsive due to changes in the merchant’s business environment.
Accordingly, a payment processor can increase or decrease the percentage or period depending on merchant performance. This way, the reserve can stay current with the level of risk.
Read about: Payment Processors vs. Merchant Acquirers: Understanding the Differences
How to Cancel Rolling Reserve?
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Meeting the Requirements of the Reserve
The rolling reserve is typically released when the merchant meets the conditions outlined in their contract with the payment processor.
These conditions include maintaining a low chargeback ratio, achieving consistent revenue growth, and adhering to best practices in customer service and fraud prevention.
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Request a Review
When the merchant feels that he has overcome the requirements of the reserve, then the merchant can seek a review of his status.
This process will involve writing a formal request to the payment processor, supported with documented evidence that the merchant had complied with the terms of the reserve.
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Review by the Payment Processor
Upon request, the merchant’s position may be reconsidered by the payment processor through an analysis of the merchant’s performance with respect to the reserve period.
In this regard, chargeback ratios, volume of transactions, and general risk profile may form part of the analysis.
Where the payment processor feels that the merchant has discharged the requirements for a reserve, it may agree to terminate the rolling reserve.
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Release of Remaining Funds
Any balance still on reserve when a rolling reserve is released will be paid out to the merchant.
Again, depending on how the reserve agreement has been structured, this normally occurs several weeks after the request to release the rolling reserve has been approved.
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Transition to Standard Processing
Once the rolling reserve has been released, the merchant’s account goes back to being under standard terms of payment.
This would more often than not involve more favorable fees, faster access to money, and just generally friendlier terms.
Even so, it would mean a merchant being brought under normal risk management coming from a payment processor that includes monitoring of Chargeback and fraudulent cases.
Read about: International Payment Fraud: Ultimate Guide For Businesses.
Conclusion
The rolling reserve has become very important in the payment processing arena, as it shows a dynamic mechanism for managing financial risks.
They have a number of advantages to them, including improved risk management, better cash flow, and increased trust and credibility.
Although these may initially tie up some portion of a merchant’s revenue, their rolling nature provides a way to ensure money is released regularly, thus enabling merchants to manage their finances more effectively.
The merchant and payment processor should understand that there is a difference in this rolling reserve compared with any other form of reserve, whether fixed or static.
Where merchants handle the rolling reserve with care will also mean following the best practices in risk management can set up long-term successful business relationships with a payment processor.
Thus, the rolling reserve is one important tool for financial risk management in the arena of payment processing.
It will correctly balance interests for a payment processor in case of possible losses with a merchant’s need for funds to run and grow an enterprise.
The more meaningful the setting of rolling reserves is to construct and maintain a strong, valid ecosystem, especially in finances, the longer payment lands will keep changing.
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