Merchant Agreement: Meaning, Bank Relationships, Regulations

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

Erika Rasure is globally-recognized as a leading consumer economics subject matter expert, researcher, and educator. She is a financial therapist and transformational coach, with a special interest in helping women learn how to invest.

What Is a Merchant Agreement?

A merchant agreement is a contract governing the relationship between a business and the merchant acquiring bank it partners with. This document details the full range of electronic payment services that the merchant acquiring bank agrees to provide.

In most cases, such banks are responsible for facilitating every aspect of the electronic transaction process. Merchant banks frequently also serve as credit card providers for both open loop and closed loop merchant cards.

Key Takeaways

• A merchant agreement is a contract establishing the parameters of the relationship between a merchant acquiring bank and the business it serves.
• Although merchant banks chiefly facilitate electronic transaction processing, some also furnish credit cards.
• The fees merchants pay merchant acquiring banks largely depend on the number of transactions conducted.

Acquiring Bank Relationships

Acquiring bank relationships make it possible for merchants to conduct sales of goods and services using electronic payment transaction methods. This partnership entails obtaining information from the merchant’s payment gateway technology, communicating with card issuers through the acquirer’s network, receiving authorization, and settling the transaction in the merchant’s account.

The fees merchants pay for electronic payment processing services vary based on online and brick-and-mortar transactions. Merchants are generally required to pay comprehensive fees to the acquirer for each electronic transaction, which covers both the acquirer’s fees and the processor's fees. Acquirers typically also charge a monthly fee for the settlement and bank account services they provide for merchants.

In cases wherein merchants disallow electronic payments and only accept cash, they will generally set up a standard bank account, that has its own set of requirements and contractual provisions.

While merchant agreements typically apply to vendors of goods or services, they can also touch upon foundations and charitable institutions.

Rules and Requirements

Merchant agreements highlight copious rules, including the following requirements:

• The merchant must accept all valid cards issued by the payment network.
• The merchant must prominently display the logos of the payment cards it accepts.
• The merchant may not require customers to pay a surcharge on payment card transactions, except in certain countries where this practice is allowed.
• The merchant may establish a minimum transaction amount for payment cards.
• The merchant cannot accept the card to pay for illegal purchases, such as the sale of alcohol or tobacco to minors.
• The merchant must charge the sales tax to the payment card along with the purchase amount.
• The merchant cannot authorize the transaction to include an estimated tip for transactions where a tip might apply, such as restaurant purchases and taxicab fares.
• Instead of refunding a payment card transaction in cash, merchants must directly issue refunds back to the payment card used.
• The merchant must not print the cardholder’s full account number or expiration date on the receipt.
• The merchant must safeguard the cardholder’s personal information.
• The merchant must train employees to recognize potentially fraudulent transactions and phony cards.
• The merchant must provide its customers with clear refund and return policies.