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PayPal requires reserves for a percentage of sellers. That percentage is less than 1% according to the company. PayPal likens the reserves to a security deposit to cover future chargebacks and reversals.

Since PayPal began this practice, they have had a lot of questions about it from sellers, and hoping to clear up some confusion, Bill Clark, an analyst with PayPal's risk team offered the following explanation on the PayPal Blog:

To determine when to place a reserve, we look at a number of factors that may increase the risk of chargebacks or reversals – things like industry categories that have higher-than-average chargebacks, or sellers who are new to PayPal (where we’ve historically seen a higher instance of chargebacks or reversals). We reassess risk factors periodically, and if we determine that the risk has gone down in certain seller segments, we will release the reserve.

Here’s an example to put it in perspective. If a merchant sells $2,500 per month, and has a 5%, 30-day rolling reserve, then about $125 per month will be held in reserve. This equals about $4 per day being held and released 30 days later. If the seller is enrolled in the PayPal Money Market Fund, then this money will continue to earn interest while it’s in reserve.

PayPal does this to help make sure that money is always available in sellers' accounts to cover payment reversals/chargebacks that may occur. Otherwise, the seller may not have enough to cover them in their balances. If that were to happen, PayPal would be liable for reimbursing a buyer's money.

Clearly, this could add up quickly. The reserves are there basically as an insurance policy protecting PayPal's bottlom line. What are your thoughts on PayPal's policy? Are you one of the less-than-1-percent? Comment here.