Holdback (Merchant Reserve)

A holdback, often referred to as a merchant reserve, is a risk management strategy employed by merchant account providers, particularly for businesses considered high-risk. This financial mechanism involves the withholding of a portion of the funds from a merchant's credit card transactions. The primary purpose of this reserve is to safeguard the payment processor against potential losses incurred from chargebacks and disputes.

Merchant reserves are especially prevalent among businesses operating in industries with higher probabilities of chargebacks, such as travel services, telemarketing, or e-commerce sites selling high-value items. These sectors typically experience fluctuating sales volumes and higher levels of customer disputes or returns.

The typical arrangement for a holdback is a rolling reserve. In this setup, a predetermined percentage of the daily transaction volume is held back by the merchant account provider and stored in a non-interest-bearing account. The funds are typically held for a defined period, such as six months or a year, after which they are gradually released back to the merchant, provided there are no pending disputes or chargebacks against them.

This practice ensures that there are always funds readily available to cover any chargebacks that occur, protecting the financial stability of the payment processor and reducing the likelihood of unexpected financial liabilities for the merchant. For merchants, while this can impact cash flow, understanding and planning for the presence of a merchant reserve is essential for maintaining a healthy business operation in high-risk markets.