June 11, 2026

Any merchant accepting electronic payments has a payment processor. And if you have a payment processor, you have a merchant processing agreement with the processor. Such agreements generally are “form” contracts and may even be considered nonnegotiable. But the more significant a merchant’s payment volume, the more leverage that merchant may have to negotiate various important terms of the agreement.

Whether negotiable or not, not every merchant processing agreement is created equal, though they all have very similar types of terms. Some are more burdensome on merchants than others! In any case, it is important to know what terms are in your agreement because one day you may find yourself without services, with reduced services, or paying more fees (or worse, fines) than you expected with no way to avoid liability or exit the deal before the end of a long term (and even then, only if you give timely notice of non-renewal).

This article addresses some of the most common questions that arise between merchants and their payment processors during contract negotiations or when a problem arises with the services.

Reserve Accounts

Background: The agreement likely gives the processor the right at any time and without notice to require the merchant to fund a “reserve account.” Further, the processor likely has the right to increase the required reserve amount at any time. The purpose of the reserve account is to protect the processor against the risk of the merchant lacking the funds to pay for fees, chargebacks and losses due to the processor (more on “losses” later).

The reserve account is a bank account set up at the acquiring bank. The acquiring bank is the party upstream from the processor that has access to the payment networks and settles payment funds to the merchant. The reserve account is used by the processor and bank to cover fees and losses that are not paid by the merchant when due. The processor typically has a right to fund the reserve account by withholding settlement funds before forwarding them to the merchant’s external account.

Practical Considerations: In negotiations between the merchant and processor regarding the reserve account, the processor may reject all proposed limitations on its right to require you to establish, or increase funding for, a reserve account. However, the merchant may have some success putting parameters around the circumstances under which the reserve account is required, how to determine the amount required, and whether any notice will be given before the reserve account or reserve increase is triggered.

Security Interest

Background: The processor may try to extend its reach to the merchant’s funds even beyond the settlement account and reserve account. As another measure against the risk of the merchant lacking the funds to pay for fees, chargebacks and other losses, the processor may take a security interest in the merchant’s external account to which funds are settled from the acquiring bank. Such a security interest may be express in the processing agreement, or it may be implied by a

“blanket” security interest taken by the processor in all deposits or other property of the merchant.

Practical Considerations: The processor’s agreement may prohibit any other person from having a security interest in that account. That could present a problem for a merchant with a lender that has a security interest in all its assets (including accounts).

The processor also may require the merchant to procure a control agreement between the processor, merchant and the merchant’s bank with respect to such security interest in the account, but not every bank will accommodate such a request.

The agreement may need to be adjusted to account for these basic realities.

Withholding Losses

Background: Merchants should pay close attention to what amounts the processor can withhold from settlement funds otherwise due to the merchant. Funds received from the merchant’s customers are collected in a settlement account held at the processor’s acquiring bank. While held there, those funds are subject to various deductions before they are pushed out to the merchant’s external bank account.

Generally, those deduction amounts constitute all the fees the merchant owes to the processor and its upstream third parties in connection with the services, as well as chargeback disputes initiated by customers to their banks and transaction adjustments. Chargebacks are amounts disputed by the merchant’s customers that are “charged back” from the merchant’s funds and provisionally credited back to the customer pending resolution of the dispute. Adjustments are minor changes in the transaction amount that happen in the ordinary course of business. It is standard for such amounts to be deducted from settlement funds.

Practical Considerations: While these deductions are standard, the agreement also likely authorizes the processor to withhold additional amounts from settlement funds, such as any sort of fines or damages the processor incurs in connection with providing services to the merchant.

Termination

Background: Processors often reserve the right to terminate the services at any time without notice for so-called “risks” posed by the merchant relationship.

In the event of termination of the services, the merchant needs transition services during the time it takes to switch to a new processor.

Switching processors is further complicated by exclusivity provisions, which are common in merchant processing agreements.

Practical Considerations: In the negotiation, the merchant may try to define risks in order to limit the processor’s broad right to terminate the services and leave the merchant suddenly without the ability to receive customer payments. Because of the need for a transition to a different service provider, having a wind down and transition period set forth in the agreement can help make the move to a new processor more orderly and reduce unexpected costs.

You should also be aware of the following contractual terms: the agreement may

- have a long term,

- require the merchant to receive processing services exclusively from the processor, and

- give the merchant no right to terminate the agreement for convenience without penalty if the merchant feels the processor’s services are of poor quality.

Removing exclusivity from the agreement can enable a merchant to onboard a new processor relationship while the existing relationship winds down, whereas if there is exclusivity, the processor retains leverage to keep the merchant in the existing relationship.

Financial Information

Background: Your processor probably has the right to request financial information about you and your principals and owners at any time upon request. The purpose of such right is for the processor to be able to underwrite and monitor your ability to pay for the services and related losses from fraud or data breaches.

Practical Considerations: If you are sensitive about sharing financial information about your company and control persons, read your agreement! You may be able to negotiate parameters around what has to be shared, or at least limit the processor’s ability to share the information with third parties.

Indemnification and Limitation of Liability

Background: The indemnification and limitation of liability provisions of a processing agreement generally require the merchant to pay for any third-party claims (such as from merchant customers or vendors) brought against the processor that are related to the payment processing services the merchant receives from the processor. The processor, on the other hand, may offer no indemnification to the merchant at all in the reverse scenario in which a third-party claim is brought against the merchant in connection with the processor’s services.

Practical Considerations: When these provisions are negotiated, the end result usually is a section full of carveouts (such as for gross negligence), exceptions to carveouts, and complex formulas for liability caps and “super caps,” but typically none of that is present in the agreement for the benefit of the merchant unless it is negotiated. The processor at least may agree to indemnify the merchant for something that is clearly its fault, or the fault of its subcontractors, and for intellectual property infringement.

The big-ticket item here that often is a real sticking point in the negotiation is the extent of the parties’ responsibility for data breaches. The question typically is whether the processor will be responsible for a data breach it causes. Often, the processor is willing to be responsible only if the processor failed to implement industry-standard security practices. This provision really matters during the aftermath of data security incident if there is a regulatory enforcement action or private class action litigation brought on behalf of consumers whose data was breached. While cyber insurance is generally available, it generally is subject to various exclusions, so shared contractual responsibility between the merchant and processor on this point is important.

Further, many processing agreements are fraught with “no liability” clauses littered throughout the agreement regarding specific matters, such as processing delays, errant settlement amounts, fraudulent disbursement instructions, accuracy of information, or for its third-party service providers, which are basically “get out of jail free” cards in those particular situations.

Service Levels

Background: The processor may promise to provide the services in accordance with specific service levels, such as making the services available for some percentage of the time the services are supposed to be available and, if not, giving the merchant a credit on the merchant’s next bill. This can be a real selling point to the business people at the merchant company that are responsible for keeping costs down.

Practical Considerations: Be careful, as service levels are a double-edged sword. While the processor may give you credits against your fees for services for failing to meet a service level, those credits may be your sole and exclusive remedy, which may bar you from terminating the relationship or recovering the true amount of damages to your business caused by the failure of the processor that underlies the service level.

Addenda for Ancillary Services

Background: Various addenda for related services (if any) will be attached to the main agreement. Such addenda, regarding those specific services, may have their own separate sections for indemnification, limitation of liability, disclaimers, audit rights, exclusivity, termination, and other provisions generally addressed in the main agreement.

Practical Considerations: If you get comfortable with the terms in the main agreement, don’t forget to check them in the addenda, as they are likely different than the main agreement. For example, the processor’s liability may be even further limited regarding those ancillary services. The very purpose of certain addenda may be to further limit the processor’s liability, such as where the processor or its vendor offers additional information security services, and failure to subscribe to all of them lets them off the hook for liability regarding any incident such services might have addressed.

Application and Order Form

Don’t forget to read the application and order form. There may be additional provisions there that are part of the agreement. If you read closely, you may find exclusivity provisions, early termination fees, and minimum monthly fees, as well as other applicable terms that are available online at a link set forth on the application or order form.

Final Thoughts

Before reading this article, you might not have even known you had an agreement with your payment processor! Now you do, so carve out the time to locate a copy (with related links and all) and read it. If nothing else, at least it may give you ideas on how to engage in some business planning regarding the risk inherent in your processing relationship.

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