Use of Reserves
The use of reserves and guarantees is a well-established risk management practice in the financial industry, including within embedded payment organizations. It is not exclusive to ISO (Independent Sales Organization) or a trick, but rather a standard method to mitigate financial risks.
Background on Reserves:
Purpose: A reserve is typically a portion of funds set aside to cover potential losses or chargebacks. By holding a reserve, a payment processor or financial institution can ensure sufficient funds to cover unexpected events like fraud, refunds, or disputes.
How it works: Reserves can be held as rolling reserves (a percentage of transactions withheld for a period), fixed reserves (a set amount held until a certain period has passed), or as reserves triggered by specific conditions.
Background on Guarantees:
Purpose: Guarantees can involve a third party, ensuring that obligations will be met or be internal policies providing assurance against certain risks.
Types: Personal guarantees from business owners, collateral, or insurance-backed guarantees are common ways to mitigate risk in the payment industry.
Importance for Embedded Payment Organizations:
Risk Mitigation: Embedded payment providers, which often integrate payment solutions directly into platforms or services, face unique risks, including regulatory compliance, fraud, and operational risks. Reserves and guarantees are key tools in managing these risks.
Maintaining Trust: Using reserves and guarantees, embedded payment organizations can ensure they meet their obligations to customers and partners, maintaining trust and stability in their operations.
These practices are not exclusive to ISO but are widely adopted in various forms across the payment and financial services sectors. They are essential for managing the inherent risks in handling payments and transactions.
