Reserve Fund PPC Page

At Global Legal Law Firm, we’ve specialized in electronic payments litigation since 2008, both locally and across the United States. Our law firm represents ISOs, processors, agents, credit card brands, and other entities throughout the electronic payments litigation process. Many clients come to us with issues regarding bank card processing and reserve funds, and we don’t recommend attempting to navigate such complexities without expert help. All kinds of organizations may need assistance with payment processing from traditional retailers to homeowner’s associations (HOA). If you’re experiencing problems with credit card payments to your business or HOA, let our expert attorneys help you set things right.

industry leader illustration

What is a reserve fund?

Simply put, a reserve fund is a kind of savings account, or another liquid asset, that an organization sets aside for a specific purpose. This may be done to pay known expenditures or to cover financial emergencies. How much money goes into a reserve fund will depend on its specific purpose and on a special assessment including financial forecasts. These assessments, also called reserve studies, are conducted by board members to analyze the financial and physical state of an organization. An HOA, for example, may use a reserve study to determine operating funds as well as the state of condominiums and other shared properties. An HOA could also use a reserve account to cover upgrades to amenities, major expenses like heavy maintenance, and anything else relating to the property.

Reserve funds come in two basic types for most businesses. These are revenue reserves and capital reserves. Revenue reserves are built using profits from the organization whereas capital reserves are set up to store income earned from non-traditional means. A capital reserve fund will generally finance replacement costs for capital losses.

Credit Card Reserves

Any type of business, including an HOA board, can set up a reserve fund for credit card payments. Most typical businesses these days accept cards, and an HOA may accept them as payment for HOA fees like dues. Any organization that accepts credit card payments needs to be protected in cases of chargebacks, and our law firm can help.

When a customer purchases an item or service via credit card, the credit card’s bank lends them the funds to cover the expenditure. The customer then has to pay the bank back for the purchase. This is simple enough, but there’s also the fact that your own merchant bank is issuing you credit for the purchase. If the customer chooses to dispute the purchase later, your organization may be left on the hook for the resulting chargeback. This is why it’s important to have a credit card reserve fund to cover such unexpected expenses if they arise. In fact, most merchant banks will require you to maintain reserve balances in order to protect themselves. This will usually be a rolling reserve at first (meaning you aren’t required to keep any certain amount in it), but if you’re deemed to be high-risk, your bank may require a minimum fund balance for your reserve account.

indipendent sales illustration

How Global Legal Can Help You

If you find yourself dealing with an unusual amount of chargebacks, being placed on high-risk lists, or are having any other issues with payments or reserve funds, our payment litigation experts can help. The first step is to help you with documentation. Ideally, you’ll have already been keeping organized records of your transactions and chargebacks. These charges can occur up to 180 days after the initial transaction, so it’s imperative to keep all receipts and other data up to date, especially since these charges can sometimes be quite large.

Naturally, our law firm will fight for you in the event of unjust charges. If it’s found that you do owe chargebacks, and your reserve fund doesn’t have enough money to cover them, we can help you get back on track as well. We’re available for free 15-minute consultations to figure out what you need and how we can start on a plan that works for you.


Whenever a customer pays by credit card, the issuing bank has to lend them sufficient funds to cover the cost of the transaction. The bank then expects the customer to repay this amount within a specified period of time. If the customer chooses to repay this amount over a longer period, interest accrues and the bank profits from the transaction. What you may not be aware of is the fact that your merchant account provider is also issuing you a credit when they disburse funds from your accepted credit card transactions. Why is this so? Well, providers typically deposit funds from your transactions within 1-2 business days. However, the customer can dispute a transaction and file a chargeback for a much longer period of time – generally a two month period.

While merchants often end up ultimately covering the cost of chargebacks, your provider will typically issue an immediate refund to the customer while the chargeback is being investigated. This takes money, of course, and providers usually don’t have a large pile of cash sitting around to cover these types of things.

Providers can find themselves responsible for covering the cost of chargebacks, they’ve instituted something called a Reserve Account to protect themselves. The rolling reserve is the most common means of funding this type of account. A Reserve Account is a subaccount of your basic merchant account. With a rolling reserve, the Reserve Account is funded by withholding a portion (amounts vary) of your credit card transaction funds and putting them into the account to cover any chargebacks that might occur.

There is some good news. Your provider only holds your funds temporarily, although it is usually for about six to twelve months. The bad news is that Reserve Accounts are non-interest-bearing, so you won’t make any money from them. You will, however, get your money back – although you might have to wait a long time for this to happen. Depending on how your reserve is structured, your provider might eventually refund all of your money and close the reserve account altogether.

Additionally please note that unless your provider specifies otherwise in your contract, rolling reserves only apply to Visa and Mastercard credit card transactions. You won’t have funds held from transactions where the customer used a card from American Express, Discover, or some other less-popular brand. Debit card transactions are also exempt from reserve withholding, as funds for these transactions come directly out of the customer’s bank account.

In addition to protecting your provider against chargebacks, reserve accounts protect you as well, making it much less likely that you’ll experience an account hold, freeze, or termination.

Assuming that each party in the chain has accepted liability for chargebacks, the potential for chargeback liability begins with the merchant that initiated the transaction. If a chargeback occurs, then the merchant is the first entity that is liable to pay the chargeback. If the merchant is unable to pay the chargeback, then often times the “feet on the street” salesperson is the next person potentially liable for the chargeback and/or an ISO. If neither the sales agent nor ISO is available to make good on the chargeback, the liability for the chargeback continues up the chain to the member bank that sponsored the ISO. Theoretically, if the member bank were insolvent, the chain of liability would continue up to the credit card association, but this rarely occurs.

Any merchant service provider can (and usually will) require you to maintain a reserve. it’s virtually guaranteed that your contract will include a boilerplate reserve account clause in one form or another. However, you’ll only be required to maintain a balance in your reserve account if it’s specified as a condition of being approved for a merchant account. This is typically spelled out in the Merchant Application portion of your contract.

Who usually does require a reserve account? Reserve accounts are typically only thrust upon businesses that would otherwise not be approved for an account at all. These are often called “high-risk” businesses, but it includes low-risk businesses who are in unique circumstances.

While rolling reserves are typically required when the account is first opened, they can also be imposed later on if the business suffers an unusually high number of chargebacks.

If you’re in a high-risk industry, you already know that high-risk merchant accounts are significantly more expensive than vanilla, low-risk accounts. Both your recurring fees and your processing rates will be notably higher than what a comparable low-risk business would have to pay. If this wasn’t bad enough, your chances of being saddled with a rolling reserve are also much higher. Let’s be clear: Not all high-risk merchant accounts will require a rolling reserve. However, the following general categories of high-risk industries will almost always need to maintain a reserve:

1) Businesses primarily selling unregulated or poorly regulated products or services (e.g., nutritional supplements, holistic products, etc. but it can include many others.) 2) Industries that have a significantly elevated risk of chargebacks (e.g., credit repair businesses, adult entertainment, etc.) If this applies to you, you can expect to have to open and fund a reserve account as a condition of being approved for a merchant account. Depending on your processor, this might be an ongoing requirement that stays in force for the entire time your account is open, or it might go away over time as your business grows and matures – keeping up good practices and processes.

Personal credit and bad credit merchant accounts might also trigger reserve accounts.

The typical reserve account amount will depend on factors that are unique to your business, such as your average monthly credit card processing volume, how long you’ve been in business, and many others. Nonetheless, reserve accounts typically withhold around five to ten percent of your credit card transactions.

Bear in mind that they come in addition to the other expenses associated with maintaining a merchant account. Because the money that’s going into a rolling reserve isn’t going toward your bottom line, you’ll want to consider the impact a reserve will have on your cash flow very carefully before signing up with a provider that requires one. If too much of your hard-earned money is going to fund the reserve, you could end up losing money overall. In a worst-case scenario, you could end up going out of business altogether. That’s where Reserve Fund experts like Global Legal attorneys come in.

Here are some simple steps to follow when considering the impact of funds held in reserve.

Talk to your processor: communication is key. Be completely clear on the terms of the reserve. While you can find this information in your contract documents, it’s also a good idea to discuss the issue with your sales representative to clarify any questions you may have. How long will the reserve be required? When will funds be released from the reserve? What types of transactions are affected? You’ll want clear answers.

Assess your liquidity: good business practice in general. What are your anticipated sales? What are your known operating expenses (rent, utilities, payroll, merchant account expenses, etc.)? Will you still be able to make enough money after deducting funds for the reserve to cover your expenses and turn a profit?

Are you prepared for a shortfall? If not, you’ll need to explore options – obtaining a working capital loan might be a consideration.

Determine the effects of a Reserve over a long term. If maintaining the reserve is going to hinder your ability to operate your business over the long term, you need to look for ways to reduce your expenses and improve your cash flow.

Problem: withheld funds?
Problem: processing frozen?
Problem: account termination?

Global can help you with a solution to each.

First: Keep Documentation

This begins with the processing agreement.

Chargebacks can happen up to 180 days after the date of the purchase, and in the legal agreements, reserve accounts can be held up to 180 days or more for chargebacks, warranty claims, or return requests. This is why to protect your business, you should keep records of transactions at least six to nine months after they’re settled. Such records include batch data, signed invoices/receipts, contracts, or similar showing the transaction actually took place and was completed. This data is especially important to keep for unexpectedly large transactions, as it proves that the customer agreed to the transaction and reduces the risk of chargebacks. If you’re accepting a transaction that is well outside your usual size or scope, one way to make sure you have a record is to create an invoice and get everything signed.

Keep the documentation in a place where you can quickly access it. If you get a chargeback notice and decide to fight the chargeback, be sure to send the documentation back to the processor as quickly as possible, in as complete a form as possible.

All related documents and correspondence will be helpful for the attorney to review your case and provide assistance moving forward. However, if you do not have any documentation, Global Legal can still get to the bottom of your situation and provide insightful assistance.

Contact Global Legal Law Firm