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Everything a Restaurant Owner Needs to Know About Merchant Reserves

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While the nature of your business may make you more susceptible to merchant reserves than others, there are things that all merchants can do to help avoid them.

For a lot of restaurant owners, a merchant reserve is something that they may have never heard of, much less experienced. Reserves are not a topic that is often talked about during the sign-on process with a payment processor. So if it does happen, merchants are left feeling shocked and angry with only a portion of the money they were expecting in their deposits.  Restaurants already run on a razor thin profit margin, so the thought of a portion of those funds being held is a scary thought. This article will walk through the ins and outs of merchant reserves and some tips to avoid them. 

What is a Merchant Account Reserve?

In its simplest definition, a merchant reserve is when a credit card processor withholds a percentage of credit card sales in a separate account for a set period of time. If a merchant receives several chargebacks or is consistently late when it comes to paying dues, initiating a reserve allows the processor to continue supporting the merchant while also mitigating risk. The money is then held throughout the chargeback time frame or until the dues are paid, typically between 45 and 120 days. Nearly all credit card processors have language in their contracts allowing them to place a merchant reserve on their customers. 

How Common are Merchant Account Reserves in the Restaurant Industry?

In general, restaurants have extremely low chargeback rates (% chargeback rate = # of chargebacks/total # transactions) compared to other industries. This does not mean that they are immune to them though. By nature, some restaurants process transactions that are riskier than others. Nightclubs and bars offering bottle service or selling only beer and liquor are more likely to have higher check averages than a small coffee shop selling coffee and muffins. The larger the transaction, the more risk the merchant and processor take on because of the increased chargeback liability. So while not common, reserves can happen especially if your location tends to process riskier transactions. 

Tips for Avoiding a Merchant Reserve

While the nature of your business may make you more susceptible to merchant reserves than others, there are things that all merchants can do to help avoid them. 

  • Avoid Fraudulent Transaction Chargebacks:

    • EMV - Process as many transactions as possible using an EMV reader. Though using an EMV reader will not absolve you from all chargebacks, it will protect you from chargebacks with fraud related reason codes. When you process using an EMV reader, it takes the liability for fraudulent transactions off of the merchant and places it back on the card issuer.

    • Avoid Large Keyed Transactions - Keyed transactions are considered Card Not Present (CNP) and are considerably riskier than card present transactions. Not only do they cost more for you to process, if they are disputed by the card holder the chargeback that is issued will almost always be one that you can not win. If you must key large transactions into your point of sale, make sure your processor uses AVS and billing verification to weed out as many fraudulent transactions as possible.

  • Prompt Chargeback Payment - If you do receive chargebacks, it is important to repay them as quickly as possible. If your processor has issues debiting the funds from your bank, they may be prone to add a reserve on your future transactions to mitigate this issue in the future.

  • Gift Card/Deferred Revenue Sales -  A restaurant that is selling an unusual amount of gift cards may have a reserve placed on those transactions. While not common, there are recent examples of this happening during the Covid-19 shutdown.

  • Self-Funding - Self-funding is when a merchant uses their personal credit card to issue themselves a line of credit to inject funds into their business. This practice is forbidden as most processors are not willing to underwrite that type of loan. This process could also be an indicator that your business is struggling. If your processor sees this type of activity, they may hold a percentage or the entire transaction. This practice should be avoided at all costs. 

Knowledge is Power

As mentioned earlier, a merchant reserve is something that most restaurant owners will never have to deal with but something they should all know about. Merchants should know what to expect from their credit card processing partners. Knowing when and how your processor uses merchant reserves and limiting the transactions that they are commonly used for will go a long way in avoiding them.

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