When you setup your money transfer company, you will most likely be asked to set aside money for a reserve account. What is a reserve account? Why is it necessary and where is the money of the reserve account kept?
Hello. My name is Faisal Khan. I’m a banking and a payment consultant. I am going to be talking today about what is a reserve account in the money transfer world. We will talk about reserve accounts.
So let’s say I’m working, you are working with me and I am a bank or a financial institution and I’m providing you regulatory cover and I’m doing card processing for you and doing debit card processing for you, credit card processing for you, ACH for you. And obviously you have your customers, they come to your website, they do a transaction that, you know, we get the money we give it, you give it to me and I give it to the bank in the beneficiary country, and the transaction is done.
Two days later. A reversal takes place or it says oh this was a fraud. We’ve already paid the money out, and as a bank, it’s my responsibility now to give that money or have that money ready that is in dispute. How do I do that? The money has already been paid out. I come to you. I say Mr. RaaS operator or might be Mr. client or Miss client, because you are a client of mine, I want you to have a reserve fund. The Reserve Fund is going to be such that it is, think of it as a cookie jar, you’re going to put some money in. Anytime a fraudulent transaction happens, any time a reversal happens, I will dip my hand into the cookie jar take that money out, so I know that I have the money.
We will then investigate it and whatever decision is for or against this money will be utilized. If the decision was against you, we’ll take the money and give it to Visa or Mastercard or whomsoever it was. If the money was for you, if the decision is for you, we will put the money back in the cookie jar. So a reserve account is something that basically reduces my risk exposure as a bank, as a financial institution and I have access to funds and this is so, you know, let’s say you’re doing a 100 transactions a day or maybe 500 transactions a day and you say you know what my average transaction is $500. If you’re doing 100 a day, you do the math. If you’re doing 500 a day, you do the math. But, you say one out of 500 is going to be a fraudulent transaction.
So, what I will do is I will probably ask you to do, maybe 14 days or 10 days worth of or five days worth of reserve account. I’ll say OK, give me $5,000 in reserve account or give me ten days worth of transactions 1 percent in reserve account, or some manner. But, the fact of the matter is, I will have money to put my hand into and payout if the decision is against me. That is what a reserve account is.
I hope I was able to answer the question. If you have any more feel free to ask in the comment sections below, I’ll be happy to answer. Till next time, take care.
This page was last updated on December 10, 2019.