Reserves are a common industry practice used by payment processors and other financial institutions to ensure that merchants are able to cover chargebacks from their buyers. Square uses what’s known as a “rolling reserve,” in which a percentage of each credit card transaction is set aside and released on a rolling basis. These funds still belong to you, and are only used if you are unable to cover a chargeback. If no chargebacks occur, you receive the full amount.
We consider many factors before placing a reserve on your account, such as:
Prepayment for goods or services. If you are collecting payment in advance of delivering the purchased goods or services, we may place a reserve on your account until Square has a better understanding of your customer chargeback and refund rate.
Chargeback rates in your industry. Some businesses sell products or services that are more prone to chargebacks. This is especially true when a buyer may have a different expectation of the product or service than what is delivered, which is more common for home contracting and repair services, professional services, and travel and tourism services, as well as for custom-made products, such as furniture.
Chargeback rate for your account. If a significant number of your customers are disputing their purchases and/or if you have insufficient funds to support those disputes, we may place a reserve until your rate of disputed payments goes down.
Sporadic processing activity. Variations or inconsistency in transaction sizes or methods, or how many payments you’re taking within a given period, creates uncertainty around future cash flow, thus resulting in a reserve being placed on your account until a more consistent pattern is reestablished.
New to Square. If you don’t have a processing history with us, among additional risk factors, we may place a reserve on your account until we know more about how you process payments.
You will receive notification by email, and in your online Square Dashboard, before the reserve goes into effect. Also, a Reserve Report will appear in the Balance section of your online Square Dashboard. The terms of your reserve will be specified in the notification and in your Reserve Report.
The terms of your reserve include two factors: a percentage, and a duration period.
The percentage represents the amount of your daily processing that will be set aside in your reserve balance. The duration is the time frame in which we set aside these funds in your reserve before releasing them. For example, if you have a 20% reserve rate with a 90-day duration, the 20% set aside in your reserve today will be released back to your available balance 91 days from now. There is no minimum requirement on your reserve balance.
Macroeconomic environmental shifts, or changes in consumer behavior, may cause your industry to become “riskier” than it was before, meaning the likelihood of chargebacks has increased for businesses like yours. In these cases, we may apply a reserve to your account to ensure you are able to cover any chargebacks.
The reserve balance is there to help when there aren’t enough funds in your linked bank account, or available Square balance, to cover chargebacks. The reserve funds still belong to you, and will be returned to you in full if not used to cover chargebacks. Square will not use your funds for any other reason.
If a refund is issued for a payment in which a reserve was applied, the reserve amount will be released from your reserve balance, and Square will deduct the remainder from your Square balance. If your Square balance doesn’t have sufficient funds to cover the refund amount, your linked bank account will be debited to process the refund. If the refund is declined, the reserve amount will be returned to your reserve balance.