How rolling reserve works and why to use it in gambling
In payment processing, one of the most important parts is always security of everyone involved. Not just the cardholder we mean here. Risks of payment system also should be taken into account and carefully considered. To reduce level risks for PSPs that include breach of the contract by the merchant, possible fraud of payers, or an insufficient level of protection from third-party threats, various mechanics and tools are to be used.
Rolling reserve one of them and it is a set percentage amount from processing that is temporarily withheld by payment system from total transaction amount on merchant account. The purpose of rolling reserve is to protect payment system from chargebacks and fines possibly imposed by Visa, Mastercard, or partner banks. In the event of refunds for disputed transactions, payment system will use reserved funds to compensate the amount, if, for example, merchant has no available balance or no longer processes payments.
Thus, a reduction of risks for payment system is achieved, since rolling reserve allows minimizing losses related to fraud and other questionable operations. This way PSP would not need to cover them with own funds.
How rolling reserve works
Payment system sets a percentage from transaction amount that should be credited to specific reserve account and stay there for a defined time period. The size of reserve may vary depending on business type, its history, and actual level of risk. Reserved funds are usually unlocked after 90-180 days after the transaction and available to the merchant in full. Of course, only if there were no significant violations during the cooperation that resulted in compensation for losses.
In addition to standard rolling reserve size of 5-10%, in some cases, other options for reserving funds may be offered. For example, freezing a certain amount, not a percentage, or even requiring a prepayment of particular amount before starting any processing activities. Different schemes for reserving funds are chosen based on merchant level of risk and even his experience in business. In reality for startups, it’s much more complicated to get favorable terms, since almost nothing is known about them at the early stages of operation. However, during the term of cooperation, it is always possible to change rolling reserve terms that will allow both parties, payment system, and the merchant to feel comfortable.
By the level of business risk in this case we mean the real probability of money laundering in the industry and deception of the consumer. Also, level of risk depends on the product sold and overall transparency for the acquirer. For example, sale of physical goods, such as clothing or shoes online from a warehouse, is a fairly simple and understandable business model. Moreover, it is easy to check — bank or payment system employees can even come over to the merchant's warehouse and make sure that it really exists at the specified address and contains all the goods. In addition, delivery invoices can also be checked, as well as presence of real buyers.
If we consider a digital product, on the other hand, such as gambling, the nature of service is more complex and barely can be verified. Moreover, if we say merchants are honest businessmen striving to improve leisure time of their clients and providing gaming services of the highest quality, we cannot be sure that all visitors of online gambling portal share same views. In this regard, merchants in the industry are obliged to take sufficient measures for verifying of their visitors and knowing their customers (KYC). Thus, they can make sure that their website will not be used for illegal purposes by any user. Learn more about the KYC procedure in gambling.
In fact, rolling reserve is a precautionary measure taken by payment system when working with gambling operators. If they do not pay enough attention to their own security and may experience a high level of fraud and chargebacks, then payment system, having a sufficient reserve, will be able to cover potential losses.
Rolling reserve in gambling
Why should gambling be liable for rolling reserve?
For high-risk businesses, such as gambling, rolling reserve is an especially important tool. Most operators negatively perceive rolling reserve because they believe it can reduce liquidity, freezing part of funds on an inaccessible balance. This can especially affect startups that value every dollar for business development. However, business owners need to understand that they are partners with payment systems, not opponents. Therefore, such a mechanism as rolling reserve is simply indispensable.
On the one hand, it allows payment system to be confident in the future and not to bear losses due to unscrupulous merchants. On the other, merchants strengthen security of their payment flow and are even forced to allocate enough resources to maintain it. Thus, truly mutually beneficial cooperation is achieved for both parties.
Sometimes, payment systems may set a higher percentage of reserve for gambling, and the term for unblocking funds may be longer than 180 days. At the same time, with proper participation of merchant, reserve percentage can be reduced, and amount fixed until the very end of cooperation. There can be quite a few options for maintaining rolling reserve, but the main purpose is to stick to limit amounts of penalty sanctions so that this tool can be useful for its initial role.
