How can you know whether you’re doing business with an ISO that can be trusted with fiduciary responsibility for your merchant’s reserve funds?
In our settlement platform, Pioneer, we can pull up our merchant reserve balance, then log into the sponsor bank where that balance is held, and see that these two numbers are living in perfect harmony… as they should be.
That means that we know:
✔️ An exact merchant reserve balance for every merchant we’re reserving funds for in that account.
✔️ If we drill down for any given merchant, we can see a detailed ledger of deposits and withdrawals that arrive at this balance.
Total Reserve Balance = Total of balances for each merchant = Total of reserve transaction ledger entries
This sounds simple and straightforward, right? The truth is that it’s not. And some players in payments struggle with this. They struggle because of:
➡️ Sloppy accounting. Treating this balance like a lump sum instead of the many important parts and pieces that make up this account. We’ll call this negligence.
➡️ Improper accounting. Treating this balance like it’s a revenue line item instead of the asset and offsetting liability that this is. These funds don’t belong to the ISO and should never be treated this way. This is the exact scenario that led to the bankruptcy and demise of a very large payments player a while back. And unfortunately, that’s not the only case study where reserve funds have been misused.
➡️ Outsourced accounting without verification. They let their processor handle this for them, and they have no idea whether it’s being done properly.
What happens when you don’t know the exact balance that you’re holding for each merchant and how you arrived at it? Well, your reserve account starts to feel more like a Ponzi scheme. As merchants request releases, are you releasing them against their actual balance or another merchant’s? It seems fine and good until the funds run out and there is still someone making claim on those funds.
So here are some qualifying questions you can ask your ISO to ensure they handle merchant reserve accounting properly:
❓ Where are your reserve funds held? (they should be held in a controlled account with the sponsor bank)
❓ How is the balance verified? (they should have to report a reconciliation to the sponsor bank on a regular basis and even better, the ISO undergoes a financial audit each year)
❓ If they’re holding reserve funds for one of your merchants, ask how can you see the balance, including the detailed ledger? You can easily verify this ledger against your merchant’s activity to be sure this is being done properly.
