Understanding Merchant Agreements: A Comprehensive Guide

If you accept credit or debit cards at your business, you will come across a merchant agreement at some point. It’s a simple agreement between you and your payment processor that allows you to accept payments. And while you may think that a quick glance is enough, that isn't always the case.

This agreement can be deceptively complex, which is why you should take the time to ensure you know exactly what you are signing up for. Whether you’re looking at your first (or tenth) merchant agreement, it’s not too late to learn more about it.

In this comprehensive guide, we'll walk you through what a merchant agreement is, what your processor should include in one, things to look for, and what you should be cautious of. Let’s dive in.

What is a Merchant Service Agreement?

A merchant service agreement, often abbreviated as MSA or MPA (merchant processing agreement), is a formal contract that lays out the terms and conditions between a merchant and a payment processing provider. It serves as a roadmap for what you can expect throughout your relationship and ensures transparency and alignment between both parties, with many layers involved. These include things like legal compliance, payment safety, and relationship expectations.

On the other hand, if this isn't fully realized, it can lead to unpleasant surprises down the road. Larger issues such as potentially impacting your company's financials can lead to account closures, or more on the minor side, it can affect your relationship with your processor.

What sections are included in an agreement?

There are many sections and line items that should be included in your merchant services agreement. To make sure your business is safe and secure, we recommend looking out for this checklist of items in your MSA and ensuring you’re comfortable with what they mean:

• Warranty information
• Indemnification waiver/limitation of liability clause.
• Equipment terms and conditions, if applicable.
• Applicable laws pertaining to your contract.
• Your personalized processing terms. Things like your monthly processing volume limit, monthly transaction limits, single transaction limits, payment reserve accounts, and amounts.
• The general terms and conditions of your agreement. This includes the length of your contract, dispute resolution procedures, indemnification waiver/limitation of liability clause, etc.
• The PCI DSS (data security standards) compliance requirements and all other data security measures are in place and required.
• Any and all fees you’ll encounter depending on the circumstance, including your payment processing rates, PCI compliance or non-compliance fees, monthly fees, early contract termination fees (ETF), etc.
• Account termination information. This includes the contract length, and both how you could cancel your account if needed and what kind of notice they need to give before they suspend your account for any reason.
• Security information (i.e., how they are protecting your company’s payment data).

How Does a Merchant Agreement Work?

As previously stated, merchant agreements are a part of a careful relationship between you and the processing bank. This company stands between you and your funding, so you want to make sure that you trust them to handle your business with care.

The agreement is a legally binding document that operates by proactively addressing potential scenarios that may arise during your partnership, while also establishing a clear and standardized protocol. This sets the foundation for what you can expect.

Pros and Cons of a Merchant Processing Agreement

A merchant processing agreement serves as the cornerstone of any business's ability to accept electronic payments. Like any business decision, it comes with its share of advantages and disadvantages. As your business navigates the world of MPAs, weighing these pros and cons is essential to making an informed decision that aligns with your unique needs and anticipated growth.

  Pros

In the pros column, these agreements outline a streamlined and secure way to handle credit and debit card transactions, allowing your business to tap into a wider customer base and improve sales safely.

• Enhanced Payment Options: Merchant service agreements allow businesses to accept various electronic payment methods, such as credit cards and mobile payments, which can lead to increased sales and cater to different customer preferences.
• Security and Fraud Protection: These agreements often include security measures like encryption and fraud detection, reducing the risk of financial losses due to fraudulent transactions.
• Convenience and Streamlined Operations: By streamlining transaction processing, MSAs make it easier for businesses to manage payments, track sales, and improve operational efficiency.
• Data Insights and Improved Cash Flow: Merchant service providers offer reporting and analytics tools to help businesses analyze sales data and make informed decisions. Additionally, electronic payments can improve cash flow by providing faster access to funds.

Cons

Merchant processing agreements typically involve fees, which can vary widely by payment processor and on an individual level. Contract terms may also include binding agreements and early termination fees, limiting flexibility to switch providers.

• Costs and Fees: Merchant service agreements often come with some fees, including transaction fees, monthly service fees, and chargeback fees, which can add up and impact a business's profitability.
• Contractual Obligations: Lengthy contracts and termination fees can make it challenging for businesses to switch providers or exit the agreement without incurring financial penalties.
• Hidden Fees: Some agreements may have less transparent or hidden fees, leading to unexpected and potentially costly surprises.
• Data Security Risks: Storing customer payment data can expose businesses to data security risks, including the potential for data breaches and the associated consequences.

Common Elements of a Merchant Agreement

A merchant agreement will list you, the “merchant,” and your provider, the “payment processor” as the two parties to the agreement. Here’s an example of a merchant agreement:

1. Service Provided: This section outlines the core services that the payment processor will provide to the merchant. It typically includes services like authorization of credit card transactions, settlement of funds, and reporting related to credit card transactions.
2. Payment Processing Fees: This section outlines what the merchant is required to pay for each credit card transaction processed. 
3. Term: The merchant agreement will specify when the agreement takes effect and the agreement's term length. It should also outline the conditions for automatic renewal and the notice period for termination. 
4. Security: The agreement includes a commitment from the merchant to maintain compliance with the Payment Card Industry Data Security Standard (PCI DSS) and to implement any necessary security measures to protect cardholder data.
5. Settlement: The merchant agreement details the process of settling funds from credit card transactions to the merchant's bank account.
6. Chargebacks: It will state that the payment processor has the right to debit the merchant's account for chargebacks and disputes. The merchant is usually obligated to respond promptly to chargeback notifications and provide required documentation.
7. Termination: It specifies how either party can terminate the agreement, whether with or without cause. It also defines the notice period required for termination.

Be mindful that this list is not comprehensive and may not account for all the standard components found in a typical merchant agreement. One way to ensure a merchant agreement is best for your business is to discuss it with your own legal counsel and the payment processor. 

Rules & Regulations: What Merchants Should Know

When trying to review the rules and regulations that guide and safeguard the payments industry, there’s an acronym you’ll want to be aware of: PCI DSS.

PCI DSS stands for Payment Card Industry Data Security Standards, and they set the basis for the requirements you’ll be expected to adhere to as you process payments. Here are some examples of things they set the bar on:

• Data security software on each of your devices.
• Physical security for things like payment forms and unattended devices.
• Storage procedures for purging old data or retaining recurring payment information.
• Adequate staff training and restrictions, ensuring that only those who need access to cardholder information have access, no one else.

Who Sets the Terms in a Merchant Agreement?

The payment processor typically sets the terms in a merchant agreement, usually in some kind of collaboration with card associations like Visa, Mastercard, or other electronic payment networks. But there’s always room for your input if you feel the terms aren’t fair and/or don’t reflect your business use cases.

These terms are established based on things like your industry, regulatory requirements, and your payment processor's offered services. While there may be some negotiation room for certain terms, they standardize many aspects of the agreement because of the need for consistency and compliance within the payment industry. These terms can cover various aspects, including transaction fees, chargeback procedures, and data security requirements.

As the merchant, you have the responsibility to carefully review and understand the terms presented by the payment processor before agreeing to the contract. It's important to ensure that the terms align with your business needs and practices, as your merchant agreement will govern how transactions are processed and managed.

Elements to Be Cautious of in Your Merchant Agreement

Now that you understand the agreement, its purpose, and why you should thoroughly read it, let’s talk about what to look out for:

1. Early Termination Fees

We’ve touched on it already, but make sure you know and are comfortable with the duration of the contract you’re signing. The industry standard for a processing agreement is three years. If you cancel early without an approved reason, you may be subject to an early termination fee. You can check to make sure that if your business closes, for example, you won’t be charged. Here, the industry standard tends to be $500, but it can vary. Review this information thoroughly so you know what to expect.

2. Aggregate Payment Processing

Payment service providers (PSPs) such as Square, Stripe, and Paypal streamline the account setup process through a concept known as aggregate payment processing. To illustrate, think of it as your business having its own dedicated line on a family phone plan, simplifying and optimizing your payment management. The pros are that your account is quick and easy to set up (because the plan already exists), but the cons are that you have little control over the terms (because, well, the plan already exists) and the main account holder (Square, Stripe, Paypal, etc.) can kick you off or withhold funds at any time for any reason.

Instead, we recommend setting up your own merchant processing agreement where you’re in the driver’s seat. You'll have a one-on-one relationship with the processor who will route your funding for you. This is important from both a consistency of service and quality of service perspective.

3. Indemnity Clauses

Finally, make sure you understand any indemnity clauses you’ll be subject to. An indemnity clause outlines the responsibilities and liabilities of the parties involved regarding certain legal issues or losses. It defines how one party (the indemnifying party) will compensate or protect the other party (the indemnified party) in case of specific events or claims. In this context, make sure you’re familiar with what your responsibilities are in the event of losses or damages resulting from or affecting your business.

How Can You Ensure Your Merchant Contract is Beneficial?

As you’ve probably realized by now, ensuring that your merchant contract is beneficial to your business and aligned with its interests requires careful consideration and diligence. Let's go over some helpful tips to help you get there:

• Thoroughly review the contract. This probably goes without saying at this point, but read through the entire contract, including the fine print or any linked amendments/addendums. Pay especially close attention to terms related to monthly, annual, and equipment fees, processing rates, contract duration, early termination fees, and any potential hidden charges. Make sure you understand every aspect of the agreement.
• If possible, get quotes and contract offers from multiple payment processing providers and negotiate terms. This will allow you to compare rates, terms, and services to find the best setup for your business. Each payment processor can also help you find any pitfalls in other provider agreements, helping you better understand each contract’s pros and cons.
• Next, ensure that the contract addresses data security and compliance with industry standards and regulations like PCI DSS. How will this processor help you protect your customer’s data? Is their system secure?
• Another helpful thing to do is to think about your business's future needs. Will the contract, equipment options, integrations, and processor accommodate your growth plans? Ensure that the terms are scalable and adaptable to anticipated changes in your business operations. It can also be helpful to seek legal advice before you sign. If the contract is complex or you have concerns, consider consulting with a legal expert specializing in business contracts. They can provide insights and advice that will help you protect your interests.
• One of the most important things to do prior to signing a merchant agreement is to review termination clauses. We’ve said it several times now, but it’s worth reiterating. Pay attention to the contract's termination policy. Understand the account closure process and costs associated with ending the agreement if needed. Avoid costly equipment that locks you in with a processor and long-term contracts with heavy termination fees if possible.
• Lastly, after signing the contract, make sure you are regularly reviewing your monthly statements to ensure that you are being charged correctly according to the terms of the agreement.

Closing Remarks

In a nutshell, it's important to know the ins and outs of your merchant agreement to avoid getting stuck in unfavorable terms. Skipping the fine print can lead to unexpected troubles, but here's where EMS comes in. Our merchant accounts come with a dedicated account manager who will walk you through each part of your agreement. This personalized help means you'll receive more than just what's written on paper so that you can make smarter choices that fit your business's needs. By teaming up with us, you'll navigate the complexities of merchant agreements with ease, with the assurance that your best interests are well protected.