How to Better Understand Your Merchant Agreement and Ensure Fair Terms
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?
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
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:
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
We get it. You don’t want to find nasty surprises on your financial statements. Protect your customers’ sensitive transaction information by aligning with Payment Depot.
Our interchange-plus pricing structure helps merchants like you save an average of $400 a month on payment processing. And our transparent pricing structure has earned us an A+ rating with the Better Business Bureau. To learn more, get in touch with Payment Depot’s incredible customer service team today!