What is Rolling reserve?

A Rolling reserve or Guarantee deposit is a type of financial security reserve that a Payment Service Provider (PSP), PF, or a bank can require from a merchant, especially if the merchant operates in a high-risk industry or has a history of transaction disputes and high chargebacks.

Essentially, the Rolling Reserve is a percentage of the merchant's revenues that the PSP holds for an agreed-upon period of time, often between 90 and 180 days, although this can vary. This is done to cover any unexpected charge or refund that may arise, such as chargebacks, penalties, disputes, or any other financial obligation that the merchant may face.

How does rolling reserve work?

Here's a simplified example of how a Rolling Reserve might work:

• Establishing the rolling reserve

The PSP or the acquiring bank determines that, due to the level of risk associated with the merchant or their industry, a Rolling Reserve is required. The percentage of retention and the duration of the hold period are agreed upon. For example, they might decide to withhold 10% of all the merchant's transactions for 180 days.

• Withholding funds

Each time a credit or debit card transaction is made, the PSP withholds 10% of the transaction amount. These funds are kept in the Rolling Reserve account.

• Releasing funds

After the hold period has passed (in this case, 180 days), the withheld funds start being released to the merchant. Typically, funds are released in a "first in, first out" cycle. Therefore, funds withheld on the first day of the Rolling Reserve would be the first to be released to the merchant.

Which companies are subject to guarantee deposits?

Rolling Reserves are more common in businesses operating in industries deemed "high risk." This can include sectors such as e-commerce, event ticket sales, tourism, the tobacco and alcohol industry, online dating services, and other businesses with a high transaction volume or with a history of transaction disputes and chargebacks.

In addition, merchants with a history of financial trouble or who are new and do not have an established sales history may be subject to guarantee deposits.

It's important to remember that the terms and conditions of the Rolling Reserve vary from one PSP to another, so merchants should read and understand their payment service agreement before accepting it. If a merchant has questions or concerns about the Rolling Reserve, they should discuss them with their PSP.

Although the Rolling Reserve can be seen as a challenge to a merchant's cash flow, it is a common practice in the payment industry to mitigate financial risk and protect both the PSP and the merchant from potential financial losses.