Merchant Services Agreement

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Merchant Services Agreement

A Brief Introduction About the Merchant Services Agreement

Merchant organizations need to provide electronic payment facilities to their customers as this provides a great deal of flexibility compared to conventional cash payment modes. A merchant acquiring bank enables the electronic transaction process required by the merchant organization. If, however, the merchant wants to allow only cash payments, then a standard bank account will need to be opened and the related formalities complied with.

Merchant banks provide both open loop and closed merchant cards. Open-loop merchant cards can be used by customers in any merchant establishment, and a merchant service fee is levied for every transaction. Closed-loop merchant cards are accepted either in a particular store or branches of a specific merchant. The complete list of services being provided by the merchant acquiring bank will be mentioned in the agreement.

The merchant services credit card processing service enables customers to make payments through a secured payment gateway. The merchant establishment should, however, be wary of chargebacks. A chargeback is a credit card refund where the bank issuing the credit card has to pay. This could lead to the termination of the merchant account by the bank.

What Is Merchanting

The selling of goods or services by a trader or a merchant is known as merchanting.

Who Takes the Merchant Services Agreement? – People Involved

In a merchant services contract, there are two parties to the agreement. The merchant is one party who needs to provide electronic payment facilities to their customers. The other is the merchant acquiring bank who enables the electronic transactions.

Purpose of the Merchant Services Agreement – Why Do You Need It?

Customers are looking at flexibility when it comes to payment modes. In a digital age, the only way to increase revenues would be offering electronic payment facilities to customers. The entire electronic payment process is facilitated by the merchant acquiring bank. The processing network of the acquiring bank will depend on whether the merchant established is offline or online. Apart from banking and processing transaction, credit card services are also provided by the acquiring bank. The merchant may choose only cash payments, and for this, a standard bank account needs to be opened, which will require its contract requirements.

The entire process of payment facilitation, which includes obtaining information from the merchant’s payment gateway, getting authorization from the card issuer, and finally settling the merchant’s payment. To avail of these services, the merchant needs to agree with the acquiring bank.

Contents of the Merchant Services Agreement – Inclusions

The agreement essentially contains the entire range of services provided by the acquiring bank and the terms and conditions that the merchant needs to abide by to avail of those facilities.

Here is the information that such agreements should include:

  • The effective date of the agreement
  • The names of the merchant and the acquiring bank
  • The different services being provided by the acquiring bank
  • Definitions like software, financial process, manager website
  • Merchant obligations which include safeguarding the login id and password
  • Acquiring bank’s obligations, which include secure transactions and technical support.

How to Draft the Merchant Services Agreement?

While drafting the agreement, the following points need to be kept in mind:

  • The merchant and acquiring bank should have entered the agreement without any coercion
  • The acquiring bank will be charging a fee for the services provided, and this should be mentioned
  • Both the parties should have entered the contract in good faith
  • There should be no disclosure of any confidential information by either party
  • The agreement should state whether arbitration or litigation will be followed for resolution of disputes
  • Premature termination of the contract should be enabled through a notice
  • The agreement should be by the governing laws of the state
  • The last page of the agreement should be reserved for the signatures of the official representative of the acquiring bank and the merchant

How to Get out of the Merchant Services Agreement?

Getting out of a merchant services contract entails a termination fee. To avoid this fee, ensure that:

  • Everything is documented about your processor
  • Read the agreement carefully with emphasis on a personal guarantee
  • Send the cancellation through recognized mail

Negotiation Strategy

To get the best merchant services rates, the merchant needs to find out the rates offered by different acquiring banks. The different services being offered by these banks should be compared before deciding on a bank. The merchant and the bank should then negotiate the final rate.

Benefits & Drawbacks of the Merchant Services Agreement

The Benefits of the Are as Follows:

  • Protection of interest of both parties: The acquiring bank gets a processing fee for providing an electronic payment process to the merchant. The merchant can ensure that payments through digital methods by customers are enabled
  • Termination of contract: If the acquiring bank decides to hike the fee charged for their services before the end date of the contract, the merchant can terminate the contract

The Drawbacks of the Agreement Are:

  • Fee increase: The acquiring bank can increase the processing fee, and this will make processing transactions costlier for the merchant
  • Service support: The support provided by the acquiring bank might not be of the required standard, and the merchant might suffer a loss

What Happens In Case of Violation?

In any party violates the Merchant services agreement, the injured party sends a legal notice. After that, the injured party may claim monetary damages, including loss of profit. If fraud is involved, then rescission of the contract will take place where the contractual obligations of the parties cease. The court insists on reformation of the contract, which would involve drafting a new contract.

If a party is not competent, then the other party has to return their money or property through restitution(1). If the contract is near completion, the injured party will insist on specific performance.

A merchant services agreement is important for every merchant wanting to provide electronic payment services to their customers. They need an acquiring bank that provides these services for a fee. Both parties should read the terms and conditions of the agreement before signing.