What Is a Merchant Agreement?

Merchant Agreement Explained in Less Than 5 Minutes

Definition
A merchant agreement is a contract between a business that sells goods and services, or a merchant, and the company processing their credit and debit card transactions.
A bakery store owner hands a credit card machine to a customer.
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A merchant agreement is a contract between a business that sells goods and services, or a merchant, and the company processing their credit and debit card transactions. The merchant agreement is needed to allow businesses to accept card payments from consumers.

While merchant agreements are primarily for businesses, learn what effect they may have on you as a consumer and your finances.

Definition and Example of a Merchant Agreement

A merchant agreement is a contract that allows businesses to accept credit card payments for consumer purchases. It is a legal agreement between a business (merchant) and a financial institution, known as an acquiring bank, to accept and process bank card payments.

  • Alternate names: merchant services agreement, merchant processing agreement

The term “merchant” can refer to any individual such as a small business owner or a large company that wants to engage in bank card transactions with their customers.

Note

An acquiring bank, also known as a merchant bank or an acquirer, is the financial institution that obtains (or acquires) the contract with the merchant. These banks provide payment processing services typically by entering into a merchant services agreement with the business and a processing agreement with the bank card companies.

So, for example, when you want to make a credit card purchase at checkout, you may see a sign that states “MasterCard, Visa, or Discover accepted.” This means the business has entered into a merchant agreement that allows them to process and receive payment from these credit card companies.

How a Merchant Agreement Works

Being able to accept card payments is essential for many businesses, such as retailers and restaurants. However, since companies can’t do this independently, they must set up a merchant account with an acquiring bank.

Note

An acquiring bank must be a member of the bank card association before providing merchant accounts. MasterCard and Visa are the most significant bank card associations in the industry when it comes to the number of cards issued.

The acquiring bank signs up merchants so they’ll be able to accept payment cards, and also arrange the processing services. This is where the merchant agreement comes into play. It outlines how the relationship between both parties will work. Additionally, the merchant agreement allows the acquiring bank to work as an intermediary between the customer’s credit or debit card account and the business’ bank account. It also covers details such as credit card processing fees, price changes, termination policy, cardholder information security, and more.

Acquiring banks may set up merchant agreements directly with the merchant, or they may contract through a third party known as an agent bank to control costs.

Essentially, a merchant agreement provides businesses with the ability to accept card payments from customers. For example, let's say a retail store like Walmart opens a merchant account with Chase bank. In the merchant agreement, Chase agrees to process all Visa and MasterCard customer payment transactions on Walmart’s behalf. As a result of this agreement, you could pay with your Visa or MasterCard at Walmart.

Requirements for a Merchant Agreement

If you’re a business owner, you first need to be approved for a merchant account by the merchant bank, which can accept or reject you for a number of various reasons. You could get denied if the merchant bank feels you are too high-risk; for example, if your chargeback volume is high, your financial status is weak, or the business you own isn’t a valid business.

Other standards a merchant bank may use to evaluate a merchant include:

  • A signed merchant application, merchant processing agreement, and (if applicable) a signed corporate resolution
  • An on-site inspection report
  • Credit reports on the principal(s) of the business
  • An evaluation of financial statements, tax returns, or credit reports on the company
  • An analysis of past merchant activity, such as the latest monthly statements from the most recent processor
  • An analysis of projected sales activity, such as average ticket amount or sales volume
  • The assessment of any existing relationship, such as a loan with the bank
  • Consideration of the line of business or the product(s) offered by the merchant
  • Verification of trade and bank references
  • Evidence as to whether the merchant is on the Member Alert To Control High-Risk Merchants (MATCH) system

Advantages and Disadvantages of a Merchant Agreement

For consumers, the advantage is that when businesses are able to accept credit and debit card transactions, they get the convenience of being able to pay with a credit card. Additionally, transactions are fast and easy.

For businesses, accepting credit card payments allows them to meet customer payment needs, potentially attract more customers, and grow their sales.

A disadvantage for businesses is that every time a customer swipes a card, the acquiring bank charges the company a transaction fee, which is generally based on a percentage of the sale. Some other fees include processing and chargeback fees.

Key Takeaways

  • A merchant agreement is a contract between a business and an acquiring bank for processing credit card payments.
  • .A merchant agreement allows businesses to accept credit card payments from customers.
  • Merchants usually have to pay swipe fees, or transaction fees, which are based on a percentage of the sales.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1.  U.S. Securities and Exchange Commission. “Sponsorship Agreement.” Accessed Feb. 1, 2022.

  2. Department of Financial Protection and Innovation. “Agent of Payee Exemption - Payment Processing Service.” Accessed Feb. 1, 2022.

  3. Office of the Comptroller of the Currency. “Merchant Processing, Comptroller's Handbook.” Accessed Feb. 1, 2022.

  4. Federal Deposit Insurance Corp. “FDIC: Credit Card Activities Manual.” Accessed Feb. 1, 2022.

  5. Office of the Comptroller of the Currency. “Merchant Processing, Comptroller's Handbook.” Page 8. Accessed Feb. 1, 2022.

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