Receiving Notice of a Rolling Reserve: What It Means for Your Business

Rolling Reserve Added – Why Us?

Receiving notice from your acquiring bank that they are imposing a rolling reserve can be unsettling, particularly if you’ve been processing transactions with them for a while without issue. This change can feel sudden and may significantly impact your business's financial planning and cash flow. Understanding why this happens, and how it affects your operations, is essential for navigating this challenging situation.

Why Banks Impose Rolling Reserves

Banks typically notify merchants of a rolling reserve when they reassess a business’s risk profile. This reassessment can occur due to a range of factors, including:

• Industry Trends: A surge in chargebacks or fraud within your industry could make banks more cautious, even if your business has not contributed to the problem.
• Transaction Volume: A significant increase in sales volume might trigger concerns about the bank's exposure to potential disputes or refunds.
• Historical Performance: Even a small uptick in chargebacks or refunds can prompt banks to tighten their risk controls.
• Policy Changes: Internal changes in the bank’s risk appetite or compliance with new regulations can also lead to the introduction of rolling reserves for existing merchants.

When a bank decides to impose a rolling reserve, it’s usually accompanied by details about the reserve percentage, the duration of the withholding period (often 90 to 180 days), and the conditions under which the funds will be released.

Businesses Historically Affected by Rolling Reserves

Rolling reserves have historically been imposed on industries considered high-risk due to the nature of their operations. These include:

• Travel and Hospitality: Long booking lead times combined with frequent cancellations and chargebacks make these businesses susceptible to reserves.
• Subscription Services: High churn rates and disputes over recurring payments often lead banks to view this sector as risky.
• E-Commerce and Online Marketplaces: The potential for fraud, non-delivery, or dissatisfaction with products heightens perceived risk.
• Event Management: Businesses reliant on ticket sales are often required to operate with rolling reserves due to the risk of event cancellations.
• Custom Goods: Industries like bespoke furniture, bridal shops, or made-to-order items face reserves because of the long timeframes between payment and delivery.

These industries share common traits that banks view as indicators of potential liability, such as delayed fulfilment, high transaction values, or susceptibility to fraud and chargebacks.

The Impact of a Rolling Reserve on Cash Flow

Receiving notice of a rolling reserve can be a significant disruption to cash flow, especially if it comes unexpectedly. The reserve means a percentage of your transaction volume is withheld, reducing the funds available for operating expenses. This can make it harder to:

• Pay for inventory or raw materials.
• Cover overhead costs such as payroll and rent.
• Invest in growth opportunities, such as marketing or expansion.

For businesses already operating on thin margins, this reduction in accessible cash can create immediate challenges. Long-term reserves, where funds are released only after several months, exacerbate these difficulties.

What You Can Do

1. Clarify the Terms: Start by reviewing the notice carefully and requesting clarification from your acquiring bank if needed. Understand the reserve percentage, holding period, and what conditions must be met for the reserve to be lifted.
2. Negotiate: In some cases, banks may agree to reduce the reserve percentage or shorten the withholding period based on your business’s performance or additional guarantees.
3. Reassess Providers: If the reserve significantly hampers your operations, consider switching to another acquiring bank with a different risk appetite. Some providers may not require reserves or may offer more favourable terms.
4. Strengthen Your Risk Profile: Work on reducing chargebacks, maintaining transparent refund policies, and ensuring timely product or service delivery. Demonstrating consistent low-risk behaviour can lead to an eventual removal of the reserve.
5. Plan for the Cash Flow Impact: Adjust your financial planning to account for reduced funds, build a separate reserve to manage operating expenses, or explore temporary financing options to bridge the gap.

Switching Providers Due to a Rolling Reserve

When a bank imposes a rolling reserve, it can act as a wake-up call for businesses to evaluate their relationship with their payment provider. If the reserve creates unsustainable financial strain or you feel it is unjustified given your track record, switching providers might be a viable solution. Different acquiring banks have varying risk appetites, and some may not require a rolling reserve for businesses in your industry. Exploring alternative providers could result in more favourable terms, including lower fees or the removal of reserve requirements altogether. However, before making a switch, it’s crucial to conduct thorough due diligence on potential providers to ensure they align with your operational needs and offer the support necessary for your business to thrive.

Wrapping It Up

Receiving notice of a rolling reserve can feel like a setback, but it’s important to remember that this is a standard risk management tool for banks. Understanding the reasons behind it, recognising how it aligns with industry practices, and taking proactive steps to mitigate its impact can help you manage the situation effectively. If the rolling reserve terms are too restrictive, exploring alternative providers with a more accommodating risk appetite could provide a better fit for your business needs.