By Leo Arzumanyan
Global Legal Law Firm
Merchant processing agreements (MPAs) are the cornerstone of relationships between payment service providers (PSPs) and merchants. These contracts outline the terms under which merchants will process credit card transactions, as well as the fees, obligations and risks associated with the service.
For PSPs, negotiating MPAs effectively is crucial to building a profitable, sustainable partnership with merchants. This article explores the key considerations for PSPs when negotiating MPAs and offers strategies to protect their interests while fostering strong merchant relationships.
A Merchant processing agreement is a contract between a PSP and a merchant, detailing the services provided, including payment processing, settlement and support. The agreement covers various aspects such as pricing, responsibilities, liability and termination rights. Given the complexities of payment processing and the varying needs of merchants, MPAs must be carefully tailored to each relationship.
Following are six essential factors for you, as PSPs, to consider when negotiating MPAs.
Interchange fees and markups: One of the most critical elements in an MPA is the pricing structure. Clearly define the interchange fees (set by card networks like Visa and Mastercard) and the markups they apply. Transparency is key; hidden fees can lead to disputes and damage the PSP-merchant relationship.
Discount rate and transaction fees: The discount rate, typically a percentage of each transaction, and additional transaction fees must be negotiated based on the merchant’s processing volume, industry and risk profile. Consider offering tiered pricing or volume-based discounts to attract high-volume merchants.
Other fees: The agreement should also address any additional fees, such as monthly fees, statement fees, chargeback fees and early termination fees. Ensure that these fees are reasonable and clearly communicated to avoid future conflicts.
Chargeback procedures: Chargebacks can be a significant risk for your business, as they may result in financial losses and reputational damage. The MPA should include detailed chargeback procedures, outlining the merchant’s responsibilities for dispute resolution and the timeframe for responding to chargebacks.
Reserves and holdbacks: To mitigate the risk of chargebacks, you may require merchants to maintain a reserve or agree to holdbacks. These funds act as a buffer against potential losses. The terms and conditions for reserves and holdbacks should be explicitly stated in the MPA, including how and when these funds will be released.
Fraud prevention: Given the increasing prevalence of payment fraud, the MPA should include provisions that require merchants to implement fraud prevention measures, such as using secure payment gateways, complying with PCI security standards, and regularly monitoring transactions for suspicious activity.
PCI DSS compliance: The Payment Card Industry Data Security Standard (PCI DSS) is a set of security standards designed to protect cardholder data. The MPA must require merchants to comply with PCI DSS requirements and outline the consequences of non-compliance, including potential fines or termination of the agreement.
AML and KYC requirements: Ensure that merchants comply with anti-money laundering (AML) and know your customer (KYC) regulations. The MPA should include clauses that require merchants to provide accurate and up-to-date information, and to implement appropriate measures to prevent money laundering and fraud.
Data protection and privacy: With increasing scrutiny on data protection, the MPA must address how merchant and customer data will be handled, stored and shared. Require merchants to adhere to data protection laws and include indemnity clauses for any breaches.
Termination for cause and convenience: The MPA should clearly define the circumstances under which either party can terminate the agreement. Termination for cause may include breaches such as non-compliance with PCI DSS, excessive chargebacks or fraud. Termination for convenience allows either party to end the agreement with notice, typically after a specified period.
Notice period and transition support: The agreement should specify the notice period required for termination and any transition support you will provide to the merchant, such as assistance in switching to a new provider or settling outstanding transactions. This helps maintain goodwill and ensures a smooth transition.
Survival of key provisions: Certain provisions, such as those related to confidentiality, indemnification and post-termination obligations, should survive the termination of the agreement. These clauses are crucial for protecting your interests even after the contractual relationship ends.
Limitation of liability: To protect against unforeseen liabilities, the MPA should include a limitation of liability clause that caps your exposure to damages. This cap is often tied to the fees earned under the agreement or a specific dollar amount.
Indemnification provisions: The MPA should include indemnification provisions that require the merchant to indemnify you for losses arising from the merchant’s actions, such as breaches of the agreement, fraud or non-compliance with regulatory requirements. Mutual indemnification clauses may also be considered to protect both parties.
Insurance requirements: You may require merchants to maintain specific insurance coverage, such as general liability, cyber liability and errors and omissions insurance. The MPA should outline these requirements and include provisions for providing proof of insurance.
Payment gateway integration: The MPA should address the integration of the merchant’s payment systems with your gateway. This includes specifying who will be responsible for the integration, any associated costs and the timeframe for completing the integration.
API and software licensing: If you provide software or API access to the merchant, the MPA must include licensing terms, including usage rights, restrictions and intellectual property ownership. Consider including provisions that address updates, support and any associated fees.
Service level agreements (SLAs): SLAs are essential for ensuring that your services meet the merchant’s expectations. The MPA should define the performance metrics, such as uptime, transaction processing speeds and support response times, as well as the remedies available to the merchant if you fail to meet these standards.
Following are four best practices for MPA negotiation.
MPAs are foundational to the relationship between PSPs and merchants. By carefully negotiating these agreements, you can protect your interests, mitigate risks, and build strong, profitable partnerships with merchants. 
An alumnus of the University of San Diego, School of Law, Leo Arzumanyan has a proven track record of drafting, reviewing, revising and negotiating an extensive array of commercial contracts, including vendor, nondisclosure, employment, software-as-a-service, consulting and marketing agreements. Leveraging his prior in-house counsel background, Arzumanyan has also carved out a unique niche within the electronic payments industry as his transactional expertise now encompasses merchant processing, merchant banking and sponsorship, referral, independent sales office, and other related agency agreements. Contact him at .
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