Tuesday, June 5, 2012

Merchant Account Reserve Basic

Merchant Account Reserve BasicWhen a card acceptor is asked to leave a reserve, a portion of its revenues from the monthly transactions is held in an escrow account as protection against possible future losses from chargebacks that the merchant account provider may incur. Reserves are imposed mostly on high-risk businesses and, upon the successful completion of a predefined period, the funds are released back to the retailer. A particular form is the so-called "rolling reserve," where the funds are held each month for a period of typically 6 months. On the 7th month the 1st month's reserve is released to the retailer, then on the 8th month the 2nd month’s reserve is released and so on until the reserve is exhausted.

A reserve can also be required by a merchant account provider if a card acceptor has a bad credit score, on top of a personal guarantee. Usually, whenever a reserve is imposed, the minimum reserve amount in the merchant account is calculated at about 20% or so of the expected overall credit card processing volume. New businesses are typically allowed to build up their reserve amount by keeping transaction amounts which are not taken out until the minimum reserve amount is compounded; after that, the card acceptor is allowed to take possession of the excess money for funding into their bank account.

Every merchant account provider has a unique underwriting policy and its reserve mandates will vary, so it is a great idea that you should obtain multiple merchant account proposals prior to making a decision. It can just turn out that one of the processing banks will not have a reserve requirement for you. You need to also keep in mind that the reserve is just one of the factors that you should evaluate when selecting a payment processing provider. Processing fees are another one and we have examined them in other posts. Listed below is a breakdown of the rates and charges that make up the processing fees:
  • Discount rate - what the card acceptor is charged by his processor for acquiring the merchant's payments. It consists of a percentage rate (e.g. 2.15%) and a fixed, per-item, fee (e.g. $0.20).
  • Authorization fee - another per-item fee. You must not agree to pay more than $0.10 for any type of merchant account.
  • Application or set up fee - both are one-time charges to which you should not agree!
  • Monthly service fee - as the name of this fee suggests, it is assessed monthly to maintain your account on file. It should not exceed $10.
  • Support fee - another per-month fee charged for customer service and you should not agree to be paying it.
  • Payment gateway fee - specific to web-based merchants. It should not be costing you in excess of $19.95 per month.

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