Running a business that takes credit card payments can require having a fixed reserve on your merchant account.
Reserves are often used by payment processors, especially for businesses considered high-risk. This can restrict your cash flow and hold funds you need to invest back into your business. In this article, we will discuss how you can steer clear of having one on your merchant account.
What Is a Fixed Reserve on a Merchant Account?
A fixed reserve is a predetermined amount of money that a payment processor holds back from your sales. The reserve is typically a percentage of your monthly sales, and it is held as protection for the processor in case of chargebacks, fraud, or any other financial risks. The amount held in reserve is usually calculated based on your business’s risk level, the industry you’re in, and your payment processing history.
For example, if you’re a high-risk business, such as an online store or a travel service, your payment processor might require that a certain percentage (say 20%) of your monthly sales be held in reserve for up to six months. While the funds technically still belong to you, they are not available for you to use until the reserve is released.
Why Do Payment Processors Require a Fixed Reserve?
Payment processors place fixed reserves on merchant accounts to protect themselves from risk. If you are a high-risk merchant, it means there is a higher chance of chargebacks or fraud, which can lead to financial losses for the processor. A fixed reserve acts as a safety net, ensuring that the processor has funds available to cover these potential losses.
Merchants in high-risk industries like travel, digital goods, and subscription services are more likely to be subject to fixed reserves. Additionally, if a merchant has a poor credit history or a history of chargebacks, they may also be more likely to have a reserve placed on their account.
While reserves may seem like a burden, they help the processor reduce their financial risk and maintain a stable payment system. However, for merchants, the downside is that the funds tied up in a reserve can negatively impact cash flow and limit the ability to reinvest in the business.
How to Avoid a Fixed Reserve on Your Merchant Account
The good news is that there are several ways you can avoid having a fixed reserve placed on your merchant account, or at least reduce the impact it has on your business. By taking steps to reduce your perceived risk, you can improve your relationship with your payment processor and avoid the need for a reserve altogether. Here are some strategies to help you avoid having a fixed reserve:
1. Maintain a Low Chargeback Rate
Chargebacks are one of the primary reasons payment processors place reserves on merchant accounts. When customers dispute a transaction, it can result in a chargeback, which costs the processor money. High chargeback rates indicate to the processor that your business is risky, and this can lead to a reserve being placed on your account.
To avoid this, focus on maintaining a low chargeback rate. Here are a few tips to help reduce chargebacks:
- Provide clear product descriptions and make sure your customers know exactly what they’re buying.
- Keep customers informed about the status of their orders, especially if there are any delays. This can help prevent disputes.
- Implement clear refund and return policies. This will reduce the chances of customers filing chargebacks when they’re unhappy with a product or service.
- Resolve issues quickly. If a customer raises a complaint, try to resolve it quickly and professionally. This can help prevent the situation from escalating into a chargeback.
By keeping your chargeback rate low, you show your processor that you are a responsible business owner, which reduces the likelihood of a fixed reserve being placed on your account.
2. Strengthen Your Fraud Prevention Measures
Fraud is another major concern for payment processors, and merchants with weak fraud prevention measures are often seen as high risk. Here are some ways to strengthen your fraud prevention:
- Use AVS (Address Verification System) and CVV (Card Verification Value). This can help ensure that the person making the payment is the cardholder.
- Monitor transactions and set up alerts for suspicious transactions. Look out for high-ticket items, international transactions, or rapid repeat purchases.
- Use secure payment gateways. Make sure your website uses secure payment processing systems that comply with the Payment Card Industry Data Security Standard (PCI DSS).
- Limit risky countries, if you’re accepting international payments, consider blocking transactions from countries with high rates of fraud.
By showing your processor that you’re actively working to prevent fraud, you can improve your chances of avoiding a fixed reserve.
3. Show Consistent Sales Performance
Payment processors want to see that your business is stable and reliable. If you’ve been in business for a while and have a track record of consistent sales, it’s less likely that a fixed reserve will be required. Processors are more likely to trust businesses with a proven history of success and low risk.
To demonstrate consistent sales performance:
- Keep your business records up to date. Be transparent with your processor about your sales history, volume, and trends.
- Show growth. If your sales are consistently growing, it shows that your business is thriving, which reduces the perception of risk.
- Avoid spikes in sales. Large fluctuations in sales volume can be a red flag for processors. If your sales spike suddenly, it can signal to the processor that your business is unstable.
If your business can demonstrate stability, it may be possible to avoid having a fixed reserve placed on your account.
4. Establish a Good Relationship with Your Processor
Having a positive relationship with your payment processor is key to avoiding a fixed reserve. If you communicate openly and regularly with your processor, they’ll be more likely to work with you to find a solution that doesn’t involve a reserve.
Here’s how to establish a good relationship with your processor:
- Reach out to your processor if you anticipate any issues with your account or if your business experiences a change. For example, if you’re launching a new product line or expanding into a new market, let your processor know.
- If you’re facing any challenges with chargebacks or fraud, communicate with your processor. They may be able to offer advice or resources to help you improve.
- If you’ve been in business for a while and have improved your performance, consider asking your processor to re-evaluate your account. After demonstrating stability and low risk, you may be able to have the reserve removed or reduced.
A good relationship with your processor is invaluable and can go a long way in helping you avoid a fixed reserve.
5. Consider Working with a Niche Processor
Some niche processors specialize in high-risk industries and may be more willing to work with businesses that are considered high-risk. These processors might offer more flexible terms, including lower reserve requirements or no reserves at all.
If you’re in a high-risk industry and struggling to avoid a fixed reserve, consider exploring niche processors that understand the specific needs and risks of your business. They may offer more tailored solutions that better suit your needs.
Bottom line
Avoiding a fixed reserve on your merchant account requires proactive effort, transparency, and a focus on reducing the perceived risks associated with your business.
By maintaining a low chargeback rate, implementing strong fraud prevention measures, demonstrating consistent sales performance, and building a positive relationship with your processor, you can significantly reduce the chances of having a fixed reserve placed on your account.
With patience and a strategic approach, you can keep your business’s cash flow free from restrictions and focus on growing your business without unnecessary financial hurdles.
Need more information? Book a free consultation with our specialists today!
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Disclaimer
Widelia and its affiliates do not provide tax, investment, legal or accounting advice. Material on this page has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, investment, legal or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Please consult https://widelia.com/disclaimer/ for more information.
