What is a Merchant Reserve? And How Can You Help Manage them on Behalf of Your Merchants?

What is a merchant reserve, and how can you, as a merchant services sales office or agent, help your merchants manage this part of their processing relationship most effectively? What are the common pitfalls to avoid?

Let’s dive in. 

What is a merchant reserve, and when is it put in place?

A merchant reserve is an amount that is set aside to cover unplanned/uncovered merchant expenses such as uncollected chargebacks, debits such as returns, merchant account fees, etc. In a nutshell, it helps the ISO hedge against financial risk.

It is commonly required for higher-risk businesses that want to accept card payments. For example, future delivery businesses, merchants with significant chargeback history, or merchants operating in risky business verticals.

It can be collected as a lump sum amount to be set aside before a merchant even starts accepting payments, or more commonly, as a small percentage of each batch, typically 10-20%.

There are many flavors of reserves– rolling, capped, and more, so you’ll want to understand the terms of your merchant’s specific agreement.

Here’s the most important question to ask when a reserve is involved with a merchant account:

❓Do you trust your ISO to be a responsible fiduciary of your merchant’s funds?  True, the funds are held in a controlled account with the sponsor bank, but it is the ISO that normally ends up playing the role of gatekeeper over these funds.

You want to be sure that when it’s time to release reserve funds:
1)      Your merchant knows exactly how much is set aside in that account on their behalf. Sloppy accounting will get the better of many merchants.
2)      The funds are still there (this is more of a problem than most would like to admit) and
3)      They play by the terms of a fair reserve agreement and exercise good judgment.

Unfortunately, merchants that require reserves commonly end up getting mistreated. Sometimes they’re in a desperate place and unsavory payment players will take advantage. We share everything you need to know so that you can advocate for your merchants as their payments champion, protector of all things right and good.


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