What is a Merchant Agreement?

If you’ve clicked on this article, chances are you’re familiarizing yourself with a merchant agreement for credit card processing. This is a great step in the process for your business to begin accepting payments. Research shows consumers prefer card payments over all other available formats, and the use of cards has increased substantially year over year.^[1]The Federal Reserve. “The 2019 Federal Reserve Payments Study“. Accessed January 12, 2021. Because of this, your business will need a merchant provider in order to accept payments. Merchant services providers can help prevent eCommerce retail fraud, process your customers’ digital transactions, and deposit funds directly into your business account. To start a relationship with a merchant services provider, you’ll have to read, understand, and sign a merchant services agreement. 

What is a Merchant Agreement?

If you sell goods or services and accept credit and debit cards, chances are you’ve come across a merchant agreement before. But what exactly does it all mean?  In relation to sales, a merchant agreement is a contract between a business and a financial institution (called an acquirer) that explains how their relationship will work. This agreement outlines monthly service fees, user agreement terms, merchant account fees, and much more.

The financial institution/merchant acquirer, such as a bank, acquires the right to serve and manage the business’ merchant account when processing customers’ electronic payments. Think of the acquirer as a third-party partner contracted by a merchant to process and receive electronic transactions. Merchant acquirers will process the electronic payments through their merchant network. They also take care of important functions like managing communications, negotiating settlements, and making deposits. In exchange for this service, the merchant pays a series of fees.

So How Does It Work?

As part of the merchant processing agreement, the acquiring bank performs these steps to process and accept electronic payments:

1. The card is swiped or read. The acquirer gathers the customer’s card information from the payment terminal or Authorize.net gateway.
2. This acquirer, a financial institution, sends the information to a payment processor.
3. The Card Association (Mastercard, Discover, Visa, etc.) then sends this information to the bank where the card was issued.
4. The issuing bank either approves or denies the transaction.
5. If approved, the credit card association sends a code to the issuing bank. That same code gets forwarded to the acquirer.
6. The code then goes to the merchant’s credit card machine (payment terminal).
7. This code approves the transaction, and a receipt can be printed for the customer through the payment terminal.
8. The merchant will receive the deposit of funds into their account.

How are the Terms Set in a Merchant Processing Agreement?

When you read a merchant processing agreement, various sections appear with detailed descriptions of what will and will not be done by each party (acquirer and merchant). Once both parties agree to the terms, the merchant agreement can move forward. Some of the sections included in these agreements are:

• General payment processing service terms and conditions
• Definitions
• Merchant account
• Security interest, reserve Account, and recoupment
• Fees and amounts owed to the acquirer
• Representations and warranties
• Application, indemnification, and limitation of liability
• Auditing and information
• Term and termination
• Compliance with laws and rules
• Use of trademarks and confidentiality
• General provisions

There are various sample agreements you can read online or you can request to review the merchant processing agreement that an acquirer has. In today’s world, accepting credit cards is essential as opposed to a luxury. Because of this, it’s important to understand what the merchant processing agreement entails for your business.

Processing Fees & More

The fees merchants pay merchant acquiring banks are mostly based on the number of transactions made. Every time a customer pays with a card, the merchant service provider charges the merchant a nominal percentage. This is detailed on your monthly merchant statement.

While there are many fees to be aware of in a merchant agreement, these are the two most common types:

• Transaction Fee: The fees depend on if the transaction originated over the phone, in-person or online. Based on the payment method used, a flat fee is charged to accept card payments. This amount will vary from company to company.
• Processing Fee: Based on your average number of transactions, a merchant pays a percentage of each charge to the acquirer for their service as well.

Rules & Regulations

Similar to when you registered your business, there are many rules and regulations you must follow to stay compliant with guidelines. While merchant services agreements are quite lengthy, it’s important to read all the terms and fully understand what you’re signing. In addition, there are various rules and regulations governing each agreement that need to be taken into consideration, as they require various actions by the merchant.

Some of these terms state:

• Merchants cannot accept cards for illegal purchases, such as the sale of tobacco or alcohol to minors.
• A sound return policy must be in place for credit card payments. Merchants are not to refund credit card payments to a customer in cash. The refund must go back on the card used for the original transaction.
• All merchants must charge applicable sales tax to card transactions in addition to the purchase amount.
• The merchant can only accept credit cards issued by the payment network.

The list goes on, and it is up to the business owner to ask their merchant processing provider what credit cards are part of the payment network and which are not. Review your merchant services agreement carefully to avoid any hiccups.

What to Look Out for in Your Merchant Agreement

The vast majority of complaints made by merchants regard details found in the merchant agreement that were overlooked. By reading your service agreement in its entirety, you can often find answers to your most asked questions.

Here are the top six things to watch out for before you sign with a service provider:

1. Fees. What are the chargeback fees, refund fees, monthly statements, and payment processing fees? Is there a PCI Non Compliance Fee?
2. Monthly Volume Limit. Fees are based on the average number of transactions you conduct per month. If you exceed the limit set in your agreement, it may be more cost-effective to open up a second merchant account. Know your monthly volume limit and make sure your average and high ticket limits make sense with your sales.
3. Term. How long will the contract be in place? Merchant services agreements are often annually based or month-to-month. Longer contracts are more common for high-risk merchants. Understand when the agreement will end and whether or not it will automatically renew.
4. Reserve Hold Times. Particularly with high-risk merchant accounts, reserves can take six months to appear and are often disbursed in increments.
5. Early Termination. If your service provider isn’t working out, find out if there are early termination fees and how much they cost.
6. SIC Code/MCC Code. Every business is classified by a four-digit industry code. You can look these up online for your industry. You’ll want to make sure this is correct. If a processor misclassifies you and the discrepancy is caught, your merchant account will be canceled and you could be blacklisted from all credit card processing providers.

Review Your Merchant Agreement  

If you accept credit card and debit card payments for your business, having a clear understanding of your merchant agreement is essential to your success. As a business owner, you have the power to choose which partner will best fit your needs. Take the time to review your agreement or contact a merchant services provider today to make the best choice for your business.