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Reserve Management

Last Updated: 2025-02-17 Status: Complete

Reserves are funds withheld from merchant payouts to cover potential chargebacks, refunds, and other liabilities. Effective reserve management protects the PayFac while maintaining merchant relationships.

Quick Reference​

Reserve TypeTypical RateHolding PeriodRelease
Rolling5-10%90-180 daysAutomatic
FixedLump sumUntil conditions metManual
Capped5-10%Until cap reachedPartial automatic

Reserve Types​

Rolling Reserve​

A percentage of each transaction is withheld and released after a holding period.

FactorTypical Value
Percentage5-10% of gross volume
Holding period90-180 days
ReleaseAutomatic after holding period
BalanceBuilds then stabilizes

Fixed Reserve​

A lump sum held upfront or built over time, not released until conditions are met.

FactorTypical Value
AmountBased on monthly volume estimate
Build period30-90 days
ReleaseManual, based on performance
DurationOften 6-12 months minimum

Capped Reserve​

A rolling reserve that stops accumulating once a cap is reached.

Reserve Calculation​

Rolling Reserve Example​

MonthVolumeReserve RateWithheldReleased (180 days ago)Balance
1$100,00010%$10,000$0$10,000
2$100,00010%$10,000$0$20,000
3$100,00010%$10,000$0$30,000
4$100,00010%$10,000$0$40,000
5$100,00010%$10,000$0$50,000
6$100,00010%$10,000$0$60,000
7$100,00010%$10,000$10,000$60,000
8$100,00010%$10,000$10,000$60,000

Result: Reserve stabilizes at ~6 months of withholding.

Industry Standards by Risk Level​

Risk LevelReserve %Holding Period
Low5-10%30-90 days
Medium10-15%90-180 days
High15-100%180+ days

High-Risk Industries​

IndustryTypical ReserveRationale
Travel/hospitality20-100%Delivery delay, cancellations
Nutraceuticals15-25%High chargeback rates
Adult content15-20%Reputation risk
Gambling20-30%Regulatory risk
Subscriptions10-20%Recurring billing disputes
High-ticket items15-25%Large individual losses

Reserve Policy Design​

Factors to Consider​

FactorImpact on Reserve
Industry riskHigher risk = higher reserve
Merchant historyPoor history = higher reserve
Chargeback ratioHigher ratio = higher reserve
Delivery timeframeLonger delivery = longer holding
Average ticketHigher ticket = higher reserve
Business ageNewer business = higher reserve

Reserve Schedule by Risk Score​

Health ScoreReserve %Holding PeriodRelease Criteria
90-1000-5%30 daysAutomatic
80-895-10%60 daysAutomatic
70-7910-15%90 daysReview required
60-6915-20%180 daysReview required
< 6020-100%180+ daysManual only

Reserve Adjustments​

Triggers for Increase​

TriggerAction
CB ratio > 0.75%Add 5% to reserve
CB ratio > 1.0%Add 10% to reserve
Fraud spikeImmediate increase
Health score drop > 15 ptsReview and adjust
Network program entryIncrease to cover fines

Triggers for Decrease​

TriggerAction
6 months < 0.5% CB ratioConsider 5% reduction
12 months clean historyConsider full release
Health score > 90 for 6 monthsReview for reduction

Adjustment Process​

Reserve Release​

Automatic Release Criteria​

ConditionRelease Action
Holding period completeRelease oldest funds
Account in good standingAutomatic release
No outstanding chargebacksRelease proceeds

Manual Release Criteria​

ConditionReview Required
Early release requestManagement approval
Account closureFinal settlement review
Risk level changeReserve policy review

Release Schedule Example​

Release TriggerPercentage ReleasedTiming
180-day maturity100% of matured fundsAutomatic
6-month good standing25% of fixed reserveUpon review
12-month good standing50% additionalUpon review
Account closureRemaining balanceAfter 180-day wait

Reserve Disputes​

Common Merchant Objections​

ObjectionResponse
"My CB ratio is low"Explain forward-looking risk
"I need cash flow"Offer alternative (lower rate, longer hold)
"Competitors don't hold"Explain PayFac vs. ISO differences (see below)
"Release early"Require collateral or guarantee
ISO vs PayFac Reserve Differences

When merchants compare PayFac reserve requirements to ISOs, explain the fundamental model difference:

  • ISOs: Merchants have individual MIDs with acquirers. Reserves (if any) are held by the acquirer based on individual merchant risk
  • PayFacs: Sub-merchants share the PayFac's master MID. PayFac bears first-line liability, requiring reserves for protection

ISOs don't hold reserves from merchants because they don't bear chargeback liability. See ISO & ISV Perspectives for detailed comparison.

Dispute Resolution Process​

  1. Acknowledge - Document merchant's concerns
  2. Review - Analyze current risk profile
  3. Calculate - Determine minimum viable reserve
  4. Negotiate - Find acceptable compromise
  5. Document - Record agreement in writing
  6. Monitor - Track compliance with agreement

Financial Accounting​

Reserve Account Structure​

Reserve vs. Liabilities​

AccountPurposeOwner
Reserve balanceHeld fundsMerchant (restricted)
Chargeback liabilityExpected lossesPayFac
Outstanding disputesPending resolutionVaries

AI-Driven Dynamic Reserves​

CapabilityBenefit
Real-time risk scoringImmediate reserve adjustment
Predictive modelingForward-looking reserves
Behavioral analysisEarly risk detection
Automated adjustmentReduced manual intervention

Industry Evolution​

TrendImpact
Instant payoutsPressure to reduce reserves
Higher fraud ratesNeed for higher reserves
Regulatory scrutinyMore transparency required
Merchant competitionPressure for merchant-friendly policies

Onboarding Context:

References​

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