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The Green Sheet Online Edition

November 22, 2010 • Issue 10:11:02


The reserve fund rationale

Please advise us regarding the credit card processor/acquirer reserve fund as follows:

  1. How is the reserve money kept?
  2. Who is holding the processor reserve fund?
  3. What is the range of a reserve fund?

    Thanks for your help.

    Jerome Zhu
    Quality Merchant Services


    I brought your questions to the attention of Mark Dunn, an executive consultant in the payments industry who heads up Field Guide Enterprises LLC, a bankcard consulting and training firm www.gofieldguide.com).

    Many industry professionals are familiar with his work through the perennially popular Field Guide Seminars presented at industry tradeshows throughout the year.

    Mark offered the following answers and advice:

      The following is not legal advice. I am not an attorney, but I am an ISO business consultant with 22 years of experience in the merchant bankcard business. Since this information pertains to items that are in the agreement between the acquiring bank and the ISO or the processor and the ISO, anyone considering becoming a party to such an agreement should seek legal advice from a competent industry attorney.

      1. How is the reserve money kept? Reserves are required when the ISO takes liability for the accounts it signs up. The reserve funds are kept on deposit at the acquiring bank.

      The bank may or may not offer to pay interest on the reserve funds, but one should always ask the bank to pay interest. (Interest paid today is very low, but still amounts to some funds.)

      The ISO cannot touch these reserve funds. The acquiring bank takes reserve funds according to the sponsorship agreement with the ISO, and that usually means when there is a loss or penalty that cannot be recouped from the merchant or when such a loss is anticipated to happen or when the ISO owes money to the acquiring bank.

      2. Who is holding the processor reserve fund? Whether the third-party processor or the acquiring bank holds the reserve depends on how the ISO agreement is written. Many agreements today have the third-party processor as the primary party in the agreement, and these have the processor holding the funds. A traditional bank sponsorship agreement of an ISO, however, has the acquiring bank hold the funds.

      3. What is the range of a reserve fund? This is variable depending on the amount of processing the ISO will be doing, how many accounts are high risk, the volume of those accounts, how fast the ISO is growing and other factors.

      Most agreements, where the ISO is taking risk and is just starting out, set up an initial reserve in the $50,000 to $100,000 range for low-risk accounts and in the $200,000 to $300,000 range for high-risk accounts.

      Most agreements increase the reserve with a formula based on how much processing is being added.

      Also, please be aware that the ISO reserve is held for some time after the termination of the agreement to cover any possible losses from trailing activity.

      This length of time is usually nine months after the final transaction is processed under the agreement or any trailing activity occurs (such as a chargeback).

      Thank you, Jerome, for turning to The Green Sheet for useful information, and thank you, Mark, for your informative answers.


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