How to Better Understand Your Merchant Agreement and Ensure Fair Terms

By Jasmine Glasheen
In Merchant Tips and Insights, Credit Card Processing

If your small business processes credit card payments, you’ve already crossed paths with a merchant agreement. A merchant agreement is simply the contract between you (the merchant) and your merchant services provider. It’s the document you sign before your business starts processing credit card and debit card payments.

So, why do you need to know about merchant agreements? Aren’t most payment processing companies essentially the same for business owners? An emphatic “no.”

Your merchant agreement determines what you pay every time your customer swipes a card at your point of sale. It protects your business from chargebacks and higher than necessary credit card transaction fees.

Here’s everything you need to know about merchant agreements, the common terms, and how to protect your business in negotiations.

What Is a Merchant Agreement and Why Do You Need One?

Merchant Agreement_What Is A Merchant Agreement_Infographic

A merchant agreement is a document you sign from your merchant account provider. It dictates the terms of your relationship with your payment processing services provider. Your rate varies by the card issuer. Whether you process card transactions from American Express, Visa, Mastercard, Discover, or ACH payments, your merchant agreement determines the pricing.

The terms of this agreement vary by service provider. Your merchant agreement will determine what processing fees you pay per transaction. It also determines which warranties and monthly fees you’re privy to, as well as what types of credit card and debit card transactions your business can process.

PSA: There are articles that say that merchant agreements are between merchants and an acquirer/acquiring bank––aka your merchant bank. This is not the case. Your merchant agreement is not between you and your financial institution. Your merchant service provider is the organization that provides your merchant agreement.

What’s Included in a Merchant Services Agreement?

All merchant services agreements are not created equally. Any processing agreement that you’re considering should be reviewed in detail before you process transactions at your POS.

To get started, you’ll need your business identification number, merchant bank account number, and general information about your business. (This will help your payment processor determine whether you run a high-risk business during the assessment process.)

Here’s what to look for in your processing agreement:

Terms and conditions

PCI DSS (data security standards) compliance and all other information security measures in place

ALL fees you’ll encounter–overdraft fees, monthly fees, termination fees, etc.

Indemnification waiver/limitation of liability clause

Monthly processing volume limit

The number of business days transactions take to process

Account termination info (Look for a contract that requires written notice before they suspend your account for any reason)

Warranty information

Applicable laws pertaining to your contract

Payment reserve accounts

What you’ll pay for alternate payment methods, such as card-not-present transactions

Security interests (Look to see how they are protecting your company’s payment data)

Length of contract

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Who Sets the Terms of Your Merchant Agreement?

Your payment services provider sets the terms of your merchant agreement. However, they’re also accountable to the financial institutions and card associations they serve. Your merchant services provider pays out a percentage from each transaction to your customers’ card account provider, for instance. Check out the current interchange rates in the payment card industry here.

Are the Terms of a Merchant Agreement Negotiable?

Before you submit a merchant application, it’s important to know how much power you have over the terms and conditions of your agreement. It’s actually more than you think. Most merchant services providers let you negotiate the specifics of your services agreement.

Consequential negotiations can alter your fees for payment transactions and the length of your contract. So, don’t be afraid to advocate for yourself. Be sure to cover any omissions in your merchant agreement, so you never have any surprises on your monthly bill.

3 Things to Watch out for in Your Merchant Agreement

All merchant services agreements are not created ethically, either. Unfortunately, some payment service providers pull out some funny business in the fine print. So protect yourself and your business. Here are 3 things to look out for in your merchant services agreement:

Merchant Agreement_What To Watch Out For_Infographic

1. An Indemnity Clause

An indemnity clause protects your merchant services provider from the legal obligation to refund your losses in case of error. Say, you work with an aggregate payment processor like PayPal. They can close your account without prior notice at the slightest suspicion of fraud.

Obviously, this results in massive revenue loss. An indemnity clause, by law, prevents them from legal obligation to refund you in case of arbitration.

2. Early Termination Fees

A lot of payment service providers add sneaky caveats in this arena. Early termination fees occur when you want to cancel your account before the effective date for termination. They can range from $200-$1,000+.

So, look for “termination of this agreement” on your merchant agreement to find all of the stipulations.

3. Aggregate Payment Processing

Aggregate payment processing can negatively impact the financial condition of your business in a few ways. First, as mentioned, they can close your account at the drop of a hat. Second, your customers’ cardholder accounts are less secure.

Since all customer data is stored in one aggregate place, hackers have fewer firewalls to conquer to steal financial information. They can also access your customers’ cardholder information more easily.

While aggregate payment processing may get you up and running quickly, it’s dangerous for your business over the long term. Look for an interchange-plus pricing structure instead.

How to Ensure Fair Terms in Your Merchant Agreement

Verbal agreements rarely hold up in arbitration, if it gets to that point. So be sure to get everything you negotiate in writing––via email or added to your merchant agreement. Ask a few different payment processors for quotes before you choose one and review your contract before you sign anything.

The Bottom Line

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Quick FAQs Merchant Agreement

Q: What is a merchant agreement?

A merchant agreement is a contract between a merchant (your business) and your merchant services provider. This document outlines the terms of your relationship with your payment processing services provider.

Q: Why is a merchant agreement important for my business?

A merchant agreement is essential since it determines what you pay each time your customer executes a transaction. It also protects your business from chargebacks and unnecessary high credit card transaction fees.

Q: What are the common terms in a merchant agreement?

The terms of a merchant agreement vary by provider. However, common terms include processing fees per transaction, warranties, monthly fees, and the types of credit card and debit card transactions your business can process.

Q: Who provides the merchant agreement?

Your merchant service provider provides your merchant agreement. It’s crucial to note that your merchant agreement isn’t with your financial institution but with your merchant service provider.

Q: What do I need to get started with a merchant agreement?

To start, you’ll need your business identification number, merchant bank account number, and general information about your business. This information will help your payment processor determine whether your business is high-risk during the assessment process.

Q: What should I look for in a merchant agreement?

You should look for details such as PCI DSS compliance, all potential fees, indemnification waiver, monthly processing volume limit, account termination info, applicable laws, cost for alternate payment methods, and security interests.

Q: Can I negotiate the terms of my merchant agreement?

Yes, most merchant services providers allow you to negotiate the specifics of your services agreement. This negotiation can alter your fees for payment transactions and the length of your contract.

Q: What are some possible pitfalls to watch out for in a merchant agreement?

Some pitfalls to watch out for include an indemnity clause that protects your merchant services provider from the legal obligation to refund your losses in case of error, early termination fees, and aggregate payment processing, which can negatively impact the financial condition of your business.

Q: What is the role of my merchant services provider?

Your merchant services provider sets the terms of your merchant agreement. However, they’re also accountable to the financial institutions and card associations they serve. They pay out a percentage from each transaction to your customers’ card account provider.