How Reserve Funds Work

A reserve fund is essentially an amount of money that’s set aside for a particular purpose. You can think of reserve accounts as being akin to a savings account or other liquid asset. The most common variety of these funds that merchants deal with is the percentage of processing volume that payment processors and acquiring banks will hold to protect against chargeback instances or to cover other financial obligations.

You’ll need a reserve fund if you want to accept credit card and debit card payments, which require a sponsoring bank to process. You’ll also have reserves if you want to accept these payments through options like PayPal. The reserve fund acts as a sort of security deposit that protects the bank in case of chargebacks against you or any other issues that may arise. The amount you’ll need to place in reserves may be higher if you’re considered a high-risk merchant or if the bank is uncomfortable processing your payments for any reason.

Electronic payment litigation is extremely complex, and if you come into disputes with an acquiring bank, an independent sales organization, believe you’ve been placed on the MATCH list unfairly, or have any other issues, our experts at Global Legal can help.

Understanding Rolling Reserves

Any business that wants to accept electronic payments from popular credit card brands like American Express and MasterCard needs to work with an independent sales organization (ISO) and their financial institution’s automatic clearing house (ACH) to set up the payment methods and procedures.

The most common reason for this account is to cover chargebacks. A chargeback occurs when a customer disputes a debit or credit charge, and it’s one of the most challenging aspects of finances for many businesses. The merchant account reserve fund covers these chargebacks for credit card payments to protect the acquiring bank. If there isn’t enough money in the reserve, then the business itself may become responsible for the payment, and this can quickly add up to debilitating levels of fees.

Since there’s usually a limitation on how many chargebacks are acceptable, merchants with excessive chargebacks may be placed on the MATCH list, effectively terminating their ability to open merchant accounts until they’re cleared. This can also happen as a result of data breaches of personal information or fraudulent activity.

Releasing Reserve Funds

Generally speaking, the contract you have with an ISO or other service providers will detail financial information, such as how long your transaction reserves will be held in the reserve account. Your contract may specify a percentage of each electronic payment will be held in the reserve bank account for 60-90 days before being released to you, for example. If you’ve been deemed high-risk, a percentage may be withheld in a reserve fund for the duration of your contract with that institution. This can be a serious detriment to your cashflow, especially if it’s coupled with emergencies and unexpected expenses.

Your account may also be frozen by your sponsoring bank if they feel that they’re taking a high risk. This can be an absolute nightmare since it not only holds your funds from existing transactions, but it also stops you from accepting any more electronic payments until the issue is resolved. You’ll need to find the reason your account was interrupted and be proactive in reversing any chargeback you can and looking for any contract violations. You may need legal assistance to get your business back on track.

Legal Representation

At Global Legal Law Firm, our attorneys have years of experience in electronic payments litigation. In fact, we’ve specialized in this area since 2008. We operate in our local San Diego area and all across the United States, and we can assist you with all manner of electronic payments disputes from customers, financial institutions, and even federal agencies. Contract law works to protect both parties in an agreement, so if you’re being treated unfairly by an acquiring bank or have had an account frozen unjustly, we can help you come to a resolution.

Contact Global Legal Law Firm 

Whether you need assistance with electronic payments litigation for a high amount of chargebacks, or you’re trying to get removed from high-risk merchant lists due to reserve fund issues, our law firm can provide the best possible help. Don’t hesitate to give our attorneys a call for a brief consultation on your case. Contact us today.


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