One of the most important and most overlooked pieces of the merchant account puzzle is the merchant agreement. In order to get a merchant account, a merchant must agree to the terms of and sign a merchant agreement. (These terms are usually found on the backs of the pages of the merchant account application in very small gray or black print.) This is a legally binding contract between the merchant and the bank issuing the merchant account. The contract also addresses the merchant's obligation to agree to the rules and regulations of credit card issuers.

One issue here is that merchant agreements are legally binding contracts, so it is essential for you, as a merchant, to know the terms and conditions of your merchant agreement. And if you don't know the terms and conditions, it may be difficult for you to find someone who can answer your questions. So many companies out there providing merchant accounts are more interested in making a buck than in knowing the business. The problem comes when a merchant deals with a company that does not know the business and can't answer the merchant's questions. These companies turn a deaf ear when merchants have problems, because they don't know how to help them.

Another issue is that in most cases, the terms of merchant agreements are non-negotiable. If you are Wal-Mart or AOL, then you have some leverage to negotiate the terms of your contract, but the average merchant does not.

Here's What You Should Know

Every bank that issues merchant accounts has its own application and merchant agreement. When you are researching a merchant account provider, it is important to read the merchant agreement for every bank you are considering opening an account with. While most merchant agreements contain the same basic information, there can be significant differences in the way the contract itself is written.

Moreover, merchant agreements are extensive documents that cover a gamut of issues. A few things to be immediately aware of are reserve accounts, security interests, and advertising restrictions, and the terms "recoupment" and "set off."

Reserve Accounts

Some banks require the merchant to deposit a set amount of funds into a reserve account. This reserve account is in the sole control of the bank and the credit card issuers, not the merchant. A reserve account may not be requested or required when the merchant account is first activated, but the merchant agreement may state that it can be activated any time at the request of the bank or credit card issuers. If the reserve account is required from the onset, the merchant agreement may state that an increase to the amount being held can be implemented at any time. Further, return of any monies to the merchant from the reserve account can be withheld for up to 270 days following the effective termination of the merchant agreement. Check the merchant agreement for a reserve account clause that specifies exactly what the bank will require.

"Recoupment" and "Set Off"

Specific language generally accompanies the reserve account clause in the merchant agreement; two terms you should know are "recoupment" and "set off." While worded in different ways in different banks' merchant agreements, in short, these two terms describe the terms under which the merchant has given the bank and the card issuers the unconditional right to, at any time, withdraw or withhold any monies owed to them by the merchant. So long as a merchant is in good standing with the bank and credit card issuers, this will not affect a merchant's everyday business. However, in the event of excessive chargebacks or factoring, this could not only cost the merchant her or his merchant account and the right to obtain another one, but it could also cost the merchant her or his business. Remember that merchant agreements are intended to protect the banks and credit card issuers; clauses like these effectively provide them even more security.

Security Interest

Most merchant agreements also include a security agreement under the Uniform Commercial Code (UCC). This grants to the bank and credit card issuers a security interest and lien upon all funds in the merchant's account, the reserve account, and future sales drafts processed by the bank and card issuers. The security interest extends to the merchant's rights created by or relating to the merchant agreement to include, without limitation, all merchant's rights to receive any payments or credits under the merchant agreement. Further, if the bank or credit card issuer requests it, the merchant must agree to execute one or more financing statements or other documents to demonstrate the security interest that was granted to the bank by the merchant when the merchant agreement was signed. What the security interest does then is secure all the merchant's obligations under the merchant agreement and any other ancillary agreements the merchant may have with the bank and credit card issuers. These obligations would include fees owed for the discount rate (also known as "discount points"), chargebacks, and any other fees agreed to in the merchant agreement.

Advertising Restrictions

Merchant agreements cover more than just the honoring and accepting of credit cards. They require the merchant to follow compliance rules and regulations established and set up by the credit card companies. Some of these rules dictate the public display of promotional materials provided by the credit card companies. Most companies do this to make it more clear to customers which cards the merchant honors. However, the merchant agreement may define the way the promotional materials are to be displayed. This requirement may include banks as well as credit card issuers in its terms.

Noncompliance with the rules and regulations of the merchant agreement can result in a merchant losing her or his merchant account. If this happens, it is very difficult to obtain another merchant account, as the merchant is placed on a list comprised of merchants who lost merchant accounts for unfavorable reasons. This list is distributed among banks and credit card issuers.

Opening a merchant account is a serious and strategic part of doing business. Reading and understanding the merchant agreement is a merchant's responsibility. Just like any other legal contract, make sure you know what you are signing before you sign it. If you don't understand the language, ask questions. If the company you are working with to acquire your merchant account will not or cannot answer your questions, find another company that will.

About the Author:
Cheryl Lindloff is the founder and CEO of Aurora Technology Group LLC, an e-commerce solutions company.

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