Understanding and Negotiating Merchant Account Agreements

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Merchants account agreements can be long, complex, and very hard to understand. What’s more, there is no standard form of agreement, so contracts from different vendors contain dissimilar language. Many parts of these contracts are non-negotiable. In particular, the provisions formulated by the Associations (Visa and MasterCard) cannot be changed by “downstream” players like payment processors. Fortunately, there are some terms of the agreement which are negotiable like pricing, duration, and how quickly you get your money.

Merchant agreements have been characterized as onerous and one-side. There is both proof and justification behind this point of view. Payment processors and their upstream partners like merchant banks and Visa and MasterCard ultimately assume the risk for all transaction. If a merchant becomes insolvent, then the processor must cover the face value of all refunds and chargebacks. Considering that most processors earn less than one percent of the sale, having to make good on the full face value of any number of transactions can be financially destructive.

So, when it comes time to negotiate your agreement, there will be some areas where the merchant account provider must be uncompromising. These areas are generally include liability, indemnification, and merchant operational responsibilities. The good news is that most processors have flexibility when it comes to customary business terms. The following items are some of the most important areas where merchants may negotiate. Keep in mind however, that these terms are usually interrelated, and negotiating one point may affect your ability to negotiate another.

A Pricing Construct

Pricing negotiation has a lot to do with the format of the proposed pricing, whether “bundled” or “pass-through”. The key objective in each case, however, is to separate what the processor must pay out to other entities and what it keeps for itself. In that way, you will understand the processor’s gross profit and have a starting point for negotiation. In a pass-thru model, this is easy, because the processor’s quote and reporting states this fee separately. If you’re considering a bundled model, you’ll have to do some math – subtracting interchange and assessments from the quoted price to determine what the processor is keeping.

Price Negotiating Points

Like most business deals, negotiation comes from a position of strength. The best way to obtain this leverage is to obtain quotations from at least two competitors. This can easily be accomplished by using the Payments-Я-Us quotation service. Once you have your quotes, expect at least two or three rounds of pricing negotiations with multiple vendors. Try to avoid signing a Non Disclosure Agreements at this stage, as it will prohibit you from providing “pricing clues” to other vendors. Other ways to negotiate pricing will likely involve negotiations surrounding other provisions discussed in this article.

Ancillary and Extra Fees – Because these fees rarely originate from the Associations and are charged by the processors, they are usually negotiable. Please be sure to review our discussion of ancillary or extra fees so you will be sure to understand which fees can be negotiated or removed altogether

Contract Length

The length of the term of payment processing agreements can vary. Some payment processors will offer merchants agreements that run month-to-month. Most contracts, however, run between two and three years, with some agreements running as long as 5 years. Because longer term agreements are more valuable to the processor, merchants considering longer term contracts are likely to negotiate better pricing terms. Many processing agreements are exclusive, so merchants should carefully consider the implications of selecting a single vendor for an extended period of time. You should have all payment processing agreements reviewed by a licensed legal professional.

Funds Availability

One of the areas that merchants frequently overlook is the time it takes for the processor to deliver funds on sale transactions. Funding periods can range from one to five days, but in most cases, virtually all processors can fund your account in one or two days. Of course, you should negotiate toward next day funding. Some processors will simply accommodate a request for next day funding without a fuss, while others will relent only with an increase in price or change in some other term.

Early Termination Penalties

If you find yourself in a position where you wish or you must switch processors, then you may be subject to an early termination penalty. These penalties are often based on “liquidated damages,” namely the profit the processor would have made had you continued to process. Merchants must be sure that such contractual penalties are not applicable if the payment processor is at fault. In cases where merchants desire the flexibility to terminate at any time, be sure to negotiate this penalty downward, or eliminate this provision altogether.

Ancillary Fees

Closely examine the agreement for ancillary fees like gateway fees, address verification fees, reporting fees, etc. They can quickly add up. The processor may be entitled to certain fees because they do incur costs related to these functional areas. It’s the merchant’s responsibility, however, to determine that these functions are in fact required, and that the fees are competitive. Reporting fees, for instance, are a throwback to the paper report days. If your processor offers online reporting, why should you pay this? Negotiating away these fees is much easier if you can demonstrate a competitive bid where these fees are not proposed. Click here for more information.

Exclusivity

Many merchant agreements are exclusive. This is often one of the most difficult terms to negotiate, as exclusivity provides the processor with more control, greater profit, and less liability than if the merchant were processing with two vendors. If you cannot negotiate this provision away, then be sure to provide yourself with more flexibility by shortening the duration of the agreement and negotiating more flexible termination terms.

Reserves

If a payment processor becomes uncomfortable about processing a merchant, it may introduce a reserve or “hold back.” In this scenario, the processor would withhold a certain percentage of the merchant’s deposits as a reserve against refunds and chargebacks. There are many ways a processor can structure the arrangements. Merchants should carefully review their agreements such that they understand the trigger(s), structure and potential magnitude of such reserves. Very importantly, merchants should understand how they will recover their cash in the event they terminate the agreement or the triggering situation is reversed. If the reserves will potentially involve large sums, then the merchant should attempt to receive interest on the withheld funds.

Service Level Agreements

An SLA is a section of the agreement where your processor guarantees that it will perform to a certain level. This may involve system uptime or how quickly they can provide an authorization response. In any case, SLAs are important if you become unhappy with your processor’s performance. Typical language will define the processor’s minimum operating standards, and provide a remedy period for the processor to fix any deficiencies. If a processor cannot remedy a fault, then the SLA provides for a sequence of events that will allow the merchant to terminate the agreement without penalty. Most processing agreements do not come with standard SLAs. The inclusion of an SLA, along with all of its terms, may be negotiated.