Reserve Predictions

Objective

Always know where your reserve accounts stand. Determine how much money is currently accrued in reserves and predict how much will be released each month.

 

Potential Actions

  1. If there is a difference in the prediction and the amount recorded on your merchant account invoices, call out the merchant bank and have them explain the delta. 
  2. More accurately plan cash flow.

Video Length: 8:50

 

 

 

How do Merchant Reserve Accounts Work?

A merchant account reserve acts as a security deposit. It is an agreed upon amount (based on a contract) of the merchant's revenue that is put aside by the merchant (acquiring) bank as transactions are processed.

The reserve account safeguards the merchant bank from unplanned liability. The unplanned liability is typically related to chargebacks and since most chargeback time limits are 120 days, the reserve helps to retain the merchant’s funds for the duration of that time.

Refer to the diagram below to understand the life of a transaction. It helps to put reserve accounts into perspective. Think of the funds in a reserve account as equity required for a loan. Merchant banks are essentially extending a line of credit to merchants until the chargeback time limit expires. When there is a chargeback, the reserve funds can be used to repay the consumer.

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There are three common methods Merchant Banks leverage to establish and maintain reserve accounts. A merchant bank might use one or more of these reserve methods to safeguard against its potential liability.

  • Rolling Reserve. A percentage of each transaction that is held in reserve for a period of time. A rolling reserve typically holds 5 to 10% between 6 and 12 months. A rolling reserve gradually releases funds. Once the agreed up time period expires, the merchant bank begins releasing funds each month. The earliest withheld amounts will be released first (e.g., reserve funds held in January will be released in July).
  • Capped Reserve. A percentage of each transaction is retained until a fixed amount is reached. The fixed amount is typically half the merchant’s monthly processing volume, but may be as high as a full month’s volume. Once the capped amount has been reached, no additional funds will be held, but the money will remain in reserve for the duration of the merchant agreement.
  • Up-Front Reserve. Based on the expected monthly volume, an up-front merchant account reserve is the amount of money that must be placed into escrow at the beginning of the processing agreement.

While the funds held in a reserve account belong to the merchant, the release of funds to the merchant will depend on the terms in the contract, which will reference one or more of the methods described previously.

For example, a temporary reserve might only be needed until the perceived risk has passed. After a predetermined time period, the acquirer will review the situation. The reserve funds will either be returned or the hold will be extended.

How does the Reserve Prediction Dashboard Determine how much money is Accrued and Predict how much will be released each month?

The prediction leverages three fields in the gateway profile.

  1. Reserve Percent. A portion of the credit card volume processed will be secured to cover the potential business risk relating to chargebacks. 
  2. Reserve Term. Rolling reserves are kept on hold for a defined period of time and will be released at the end of this period. Lifetime reserves are kept until the MID is closed and then will be released after a holding period.
  3. Reserve Cap. The maximum amount that is held in reserves.

Make sure that your Gateway profiles are complete and accurate (refer to the screenshot of the gateway profile window below). When you have these three fields completed accurately for each of your MIDs, the reserve prediction algorithm should be accurate. You can then use this information to compare your invoices and call out discrepancies.

If the three values above are not specified, the algorithm uses the following business rules.

  • Reserve Percent. $0.00
  • Reserve Term. 6-month rolling
  • Reserve Cap. $0.00

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This obviously is not ideal and will result in inaccurate predictions.

Additional Resources

You may find the following Help Center articles relevant to Analytics helpful.

  1. Glossary of Measures - Complete Analytics definitions and formulas
  2. How to use Filters - Leverage the full power of Analytics date and data filters
  3. Analytics Vs. Reports - Data Calculation Methodology - Understand the differences between Analytics and Reports
  4. Analytics Overview - Foundational information to help your understanding of Analytics
  5. Glossary of Terms - industry terms and definitions