Rolling reserves are a financial buffer arrangement between payment processors and businesses. Payment processors withhold a percentage of each transaction a business processes during a specific time period; they keep this amount as protection against potential risks, such as chargebacks, fraud, and other financial liabilities. The agreement terms and a business’s perceived risk level determine the percentage of sales reserved and for how long.

After the holding period, the business receives the reserved funds; this usually occurs on a rolling basis. For example, if the reserve period is six months, the business receives the funds from January in July, the funds from February in August, and so on. As a result, a business should have a constant financial buffer of funds from the most recent transactions to cover any potential issues that might arise.

Below, we’ll cover how rolling reserves work, what types of businesses are best suited for them, their advantages and disadvantages, and more.

What’s in this article?

• What do rolling reserves do?
  
• How do rolling reserves work?
  
• Fixed (static) reserves vs. rolling reserves
  
• What types of businesses are best suited for rolling reserves?
  
• Advantages and disadvantages of rolling reserves
  
• How long should you hold rolling reserves?
  
• Types of reserve funds: Capped and up-front reserves
  
• Terminating a rolling reserve
  

What do rolling reserves do?

Rolling reserves function as a safety net in payment processing. Payment processors pull them from a business’s processed transactions, not as a penalty but as a precaution. This proactive step creates a cushion to handle unexpected issues, such as chargebacks and fraud. For businesses, rolling reserves can temporarily restrict cash flow and affect how a business handles financial planning and revenue projection. For payment processors, they serve these purposes:

• Chargeback protection: In 2023, Americans disputed over $65 billion in credit card charges. Rolling reserves help businesses and payment processors cover the costs of disputes such as chargebacks and refunds. This helps maintain payment processors’ financial stability.

• Fraud prevention: Rolling reserves deter businesses from engaging in high-risk activities by withholding a portion of funds to cover potential losses.

• Onboarding high-risk or new businesses: For businesses considered high risk because of their industry, product, or minimal transaction history, payment processors might agree to work with them only if they use rolling reserves.

How do rolling reserves work?

Here’s how payment processors withhold and release funds from rolling reserves:

• Setting terms: When a business implements payment processing with a provider, they agree on terms based on the business type, size, industry, and risk factors. These terms include the percentage of each transaction to reserve and the duration for which these funds will be kept before release.

• Withholding funds: The payment processor reserves a set percentage of the business’s daily transactions.

• Holding funds: The payment processor holds the funds for a specific period, commonly ranging from six months to a year. The business and the processor negotiate the length of time to offer the former operational flexibility and the latter protection from potential financial liabilities.

• Releasing funds: After the holding period, the business receives the funds. This occurs on a rolling basis to create a constant buffer of recent funds against sudden financial needs.

• Adjusting terms: The business and the processor can adjust the terms of the rolling reserve based on the business’s evolving financial health and risk profile. This might mean adjusting the reserve percentage in response to the business’s growth and stabilization or changes in the industry.

To illustrate, let’s say a business sells a product for $100 and has a 10% rolling reserve with a 90-day period. The processor withholds $10 from a purchase and places it in reserve. After 90 days, if no chargebacks or issues occur, the business gets back the $10.

Fixed (static) reserves vs. rolling reserves

Alternative arrangements are available for businesses or payment processors that prefer not to use rolling reserves. Some processors use static reserves, withholding a fixed amount rather than a percentage of sales. Others might require businesses to pay an up-front deposit instead of reserving a share of each transaction.

Here are the differences between fixed (static) reserves and rolling reserves:

Fixed (static) reserves

The payment processor withholds a predetermined, fixed amount of money from a business’s account up front. This amount is held for a specific period or until a certain condition is met (e.g., successful processing history, a certain number of transactions). The reserve amount typically doesn’t change, regardless of the business’s sales volume.

Static reserves offer processors security and a buffer against potential chargebacks or refunds. Processors often use them for new businesses or those with limited processing history.

Rolling reserves

The payment processor withholds a percentage of each transaction (usually 5%–15%) for a rolling period (e.g., 180 days). The business receives the older funds as new ones are added. The reserve amount often fluctuates with sales volume based on the transaction amounts.

Rolling reserves are similar to fixed reserves, but payment processors often use them to continuously manage risk. For example, processors typically use rolling reserves for higher-risk businesses or those with a history of chargebacks.

What types of businesses are best suited for rolling reserves?

Rolling reserves are ideal for these types of businesses:

• High-risk businesses: Rolling reserves can manage risks for businesses operating in industries with higher chargeback rates—such as travel, adult entertainment, gambling, telemarketing, and subscription services—or businesses selling products or services that are prone to disputes or returns, such as electronics, luxury goods, and online courses.

• New businesses: Payment processors might require rolling reserves for startups or businesses with little to no processing history until they establish a track record of successful transactions.

• Businesses with financial issues: Processors might require rolling reserves as a risk mitigation measure for businesses with poor credit ratings or financial instability.

• Businesses with high transaction volumes: Rolling reserves can benefit businesses that process large volumes of transactions by providing ongoing protection against potential chargebacks or fraud.

• Seasonal businesses: Businesses with substantial sales fluctuations throughout the year might find rolling reserves helpful because the reserve amount adjusts with their transaction volumes.

• International businesses: Rolling reserves can provide additional protection to businesses handling cross-border transactions, which might face higher chargeback risks because of currency fluctuations, shipping issues, or cultural differences.

Advantages and disadvantages of rolling reserves

Rolling reserves create advantages and disadvantages for businesses. Here’s how they can affect businesses:

Advantages

• Access to payment processors: High-risk businesses or those with limited credit history can improve their chances of obtaining merchant accounts by opting for rolling reserves.

• Building trust: Businesses can demonstrate their financial responsibility to payment processors through rolling reserves, which can then result in benefits such as lower fees and higher processing limits.

• Chargeback protection: By using rolling reserves as a safety net, businesses can cover the costs of chargebacks and refunds without depleting their working capital.

• Forced savings: Rolling reserves function as a forced savings mechanism, setting aside funds for unexpected expenses or future investments.

Disadvantages

• Reduced cash flow: By holding back a portion of revenue, rolling reserves reduce cash flow.

• Opportunity cost: Rolling reserves withhold funds that could be invested in other areas of your business, potentially limiting growth opportunities.

• Unpredictability: A fluctuating reserve amount can make financial forecasting and planning challenging.

• Potential disputes: Disagreements over the reserve amount, duration, or release schedule can strain relationships with payment processors.

• Limited control: Businesses have little control over the terms and conditions of the rolling reserve; these are usually determined by the processor’s risk assessment.

How long should you hold rolling reserves?

Here are some factors that can determine the ideal duration for holding rolling reserves:

• Industry risk: Industries with higher chargeback rates—such as travel, gambling, and adult entertainment—might require longer reserve periods (180 days or more) to cover potential disputes. Businesses in low-risk sectors might have shorter reserve periods (30–90 days) because of the lower likelihood of chargebacks.

• Business history: Businesses with limited processing history might have longer reserve periods until they establish a strong track record. Businesses with a proven history of low chargeback rates and good standing could be eligible for shorter reserve periods.

• Chargeback time frames: The standard chargeback time frames set by card networks (e.g., Visa, Mastercard) often influence the length of reserve periods. These time frames can range from 45 to 120 days.

• Payment processor policies: The payment processor will set the terms and conditions of your agreement. Some processors offer flexibility or negotiable terms.

Types of reserve funds: Capped and up-front reserves

Not all reserve funds are the same. In addition to rolling reserves, there are capped reserves and up-front reserves. Here’s how they work:

Capped reserves

As with rolling reserves, capped reserves withhold a percentage of each transaction. But there’s a maximum limit or “cap” on the total amount that can be held in a capped reserve. Once the cap is reached, no further funds are withheld, even if the reserve period hasn’t ended. For example, if a business has a 10% capped reserve with a $5,000 limit, 10% of each transaction is held until the reserve reaches $5,000. After that, no more funds are withheld, even if transactions continue.

Capped reserves provide businesses some predictability because they know the maximum amount that can be held in reserve. But those reserves can still affect cash flow, especially if the cap is reached quickly, and they might not contain enough funds for high-risk businesses or those with fluctuating sales volumes. They also offer payment processors some protection, though less than rolling reserves do.

Up-front reserves

Up-front reserves require businesses to withhold a lump sum of money up front before they can start processing payments. This amount is often based on a percentage of anticipated sales volume or the business’s risk profile. For example, a business that expects to process $100,000 per month might need to withhold an up-front reserve of $10,000.

Up-front reserves provide immediate protection for payment processors against potential chargebacks or fraud and can be less disruptive to a business’s cash flow than rolling reserves because the amount is known up front. But new or smaller businesses might find these reserves challenging because the reserves require a substantial, up-front investment and cannot easily adjust to unexpected changes in sales volume.

Choosing the right reserve type

The most suitable type of reserve depends on your business’s needs and risk profile. These are the ideal conditions for each type:

• Capped reserves might be a good option for businesses with predictable sales volumes that want some level of protection but are concerned about the impact of rolling reserves on cash flow.

• Up-front reserves could be suitable for established businesses that have strong financials and prefer a one-time payment over recurring deductions.

• Rolling reserves are ideal for high-risk businesses or those with fluctuating sales volumes. They’re the most common type of reserve because of their flexibility and scalability.

Terminating a rolling reserve

The termination of a rolling reserve is a positive transition for most businesses; it frees up capital and provides more financial flexibility. That said, a business should plan the reserve’s termination carefully to ensure it can operate without the reserve’s financial buffer. Here’s how to terminate the reserve:

Termination process

The termination process begins when the rolling reserve reaches the end of its holding period. As the end of the period approaches, payment processors usually notify businesses and give them details about the release of funds and final adjustments if needed.

Before releasing the funds, the payment processor audits the account to settle any outstanding liabilities, such as chargebacks and disputes, and make any necessary adjustments. Then the business receives the remaining funds in the reserve on a rolling basis, with the earliest-withheld funds arriving first. Once all funds are released, the reserve account is officially closed.

Effects of termination

• Improved cash flow: Access to previously withheld funds can substantially boost the business’s working capital.

• Rebalancing: Businesses often need to adjust their financial strategies after termination. For example, they might change budgeting and cash management practices to accommodate the increased liquidity. Businesses might also need to adjust their operational strategies, especially if the reserve affected their ability to expand or invest in new projects.

• Risk management adjustments: Without the safety net of the rolling reserve, businesses might need to improve other areas of risk management. For example, they might strengthen fraud detection tools or update their terms of service to reduce chargebacks.

• Payment processor relationship: Terminating a rolling reserve can affect the business’s relationship with its payment processor. The processor might renegotiate terms for transactions or reassess the business’s overall risk profile.