Banks Increase Merchant Account Reserve Requirements in Key Verticals. Will You be Impacted?
The financial consequences of the COVID-19 crisis continue to reverberate throughout the market, even months after the beginning of the pandemic. Every sector of the market is feeling the impact in some way.
As we’ve pointed out on the blog before, the COVID-19 outbreak has had the most immediate impact on merchants in travel and entertainment verticals. Merchants in other sectors have suffered too, though; the threat of shipping delays, supply chain disruption, overwhelmed customer service, and other challenges are real problems for digital sellers.
Within weeks of the outbreak, we’d already observed a 23% increase in chargeback issuances across the board. In the most impacted verticals, the figure could several times higher. And, while you may be taking action in response to this state of affairs…so are many acquiring banks.
It’s a common practice for acquirers to demand that merchants maintain an account reserve in certain situations. But, as reported in a recent feature for Digital Transactions, COVID-19 anxieties are leading many acquirers to raise their required account reserve minimums. In the piece, industry attorney Darvin R. Davitian estimates that one-fifth of his merchant clients recently received notification expressing a desire to “at least discuss the possibility of adding to their reserves.”
So what does this all mean? More importantly, what might it cost you?
What is a Merchant Account Reserve?
A merchant account reserve is a set amount of liquid cash that your acquiring bank sets aside as a financial security mechanism. The acquirer holds this cash in reserve in the event that a cardholder files a chargeback against you. If the cardholder disputes a transaction, the reserve funds could be used to repay the cardholder.
The merchant account reserve functions essentially like an escrow fund. It ensures that the bank won’t be liable for the balance of a transaction dispute, even if your operating account doesn’t have sufficient funds to cover the chargeback. This way, the acquirer doesn’t need to worry about suffering financial loss due to merchant actions.
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There are three primary forms of account reserves:
A percentage of each credit card deposit (usually 5-10%) is held in reserve for a predetermined period (typically 6-12 months). Once the predetermined time period has expired, the acquirer will begin releasing funds each month.
A percentage of each credit card deposit is reserved until a fixed amount is reached. This may be as high as a full month’s average processing volume. The money will be held for the duration of the merchant agreement.
A set amount that must be placed in escrow at the beginning of the processing agreement. Merchants can provide the funds themselves, or provide a letter of credit from another bank.
Why Do Acquirers Demand Account Reserves?
As mentioned above, acquirers may demand you maintain an account reserve as a means of insulating themselves against financial loss.
When an issuer submits a chargeback, that issuer doesn’t directly debit your merchant account. Instead, it withdraws the funds from your acquiring bank. It’s then up to the acquirer to try and recover their funds from you. Thus, requiring an account reserve allows acquirers to protect themselves from a variety of potential problems that could arise, including:
- Sudden deterioration of your financial condition
- Default under the processing agreement
- Your entrance into a chargeback-monitoring program
- Violations of payment card network rules
- Delays in the time between taking payment and fulfilling orders
- Compliance violations
- Level of perceived risk based on your product category, location, or business model
Any of the above situations could lead to a sudden surge in chargeback activity. The account reserve is how the acquirer tries to cover their end and ensure they don’t end up footing the bill if you don’t have cash on-hand to cover those chargebacks.
While this is “business as usual” under normal circumstances, the COVID-19 outbreak introduces a lot of unforeseen complications into the mix. From the acquirer’s perspective, upping account reserve requirements is a prudent way to protect their business in turbulent times, where many merchants are expected to see a surge in chargeback activity.
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What Can You Do?
Your options regarding merchant account reserve requirements vary based on the reason the reserve was imposed. For instance, if a reserve is imposed due to compliance violations or card network rule violations, you may be able to get the reserve lifted by simply rectifying the situation.
The answer isn’t always that simple, though. As another example, your acquirer may require a higher account reserve based on circumstances you can’t change, like your product category being labeled as “high risk.” And, especially with the current situation regarding COVID-19, more chargeback issuances might be out of your control.
The best course of action is to try and prevent chargebacks wherever possible. This will help you avoid losses in general, while ensuring that as little of your revenue gets tied up in your account reserve as possible. And, while there are plenty of steps you can take to both fight chargebacks and prevent disputes before the happen, your best option is seeking outside expertise.
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