By Eugene Rome
Rome & Associates
Let's face it. Many ISOs and other payment service providers cut some corners when it comes to merchant agreements. Some diehards use the same old terms and conditions they have been using since the 1990s. Some ISOs copy and paste a competitor's merchant agreement they found online. Others turn to a family member recently graduated from law school – who knows nothing about the payments industry – to draft or update their agreements.
But cutting corners to save money comes with a cost. Failing to update your merchant agreement to stay current with changes in terminology, technology and legal developments usually means failing to protect your company to the fullest extent possible.
Many outdated merchant agreements fail to account for changes in card brand rules and requirements, and provide inadequate protections when it comes to reserves, security interests, indemnity, personal jurisdiction, choice of law and personal guaranty provisions.
So what are some obvious signs that your merchant agreement needs an update?
Notwithstanding the fact that Visa and Mastercard both became public companies and stopped operating as "associations" about a decade ago, many merchant agreements still refer to them as "Card Associations." Both entities were private membership associations, but that was in the past. Visa remained a private membership association until 2007, when regional businesses around the world merged to form Visa Inc. In 2008, Visa Inc. went public in one of the largest IPOs in history. In 2006, Mastercard transitioned to a new corporate governance and ownership structure, and became a publicly traded company on the NYSE.
Thus, as publicly traded corporations, Visa and Mastercard are no longer owned by an association of private member banks – though they still set the rules for the member banks in the payment networks in which they operate. Accordingly, we now refer to Visa, Mastercard, American Express, Discover and others as card brands or card schemes, not card associations.
MO/TO stands for Mail Order/Telephone Order, and refers to card-not-present (CNP) transactions conducted by mail or over the telephone via catalog or telemarketing sales. Given that the vast majority of CNP transactions are now conducted online, however, MO/TO solutions have ever-diminishing relevance to most merchants. Nonetheless, many merchant agreements still use "MO/TO" as an umbrella term for CNP transactions.
"CNP transactions" is the appropriate umbrella term for such transactions; MO/TO should be used only to refer to a limited subset of CNP transactions.
With respect to card-present transactions, a surprising number of merchant agreements still require the merchant to "imprint the card" as part of the merchant's card acceptance procedures. Manual card imprinters have little relevance in today's payments world. Again, while manual imprint readers may be relevant to a small number of merchants operating at tradeshows, flea markets, concerts, etc., such technology has zero relevance to the vast majority of brick-and-mortar merchants.
If your merchant agreement's card acceptance provisions still speak in terms of "card imprinters" and "magnetic strip readers," but do not address chip card readers, you probably need an update.
Whenever an acquirer terminates a merchant for certain specified reasons – such as excessive chargebacks, excessive fraud, laundering – card brand rules require the acquirer to add that merchant and its principals to a database of terminated merchants. Card brand rules also require each acquirer to consult that list to screen each potential applicant for merchant processing services.
Formerly known as the Terminated Merchant File (TMF), a proprietary list maintained by Visa, both Visa and MasterCard now rely upon a distinct database maintained by Mastercard, which is known as the Member Alert To Control High-Risk (MATCH) list. While Visa still uses the term Terminated Merchant File, it specifically defines that term to refer to a file "currently known as MATCH." MATCH has now replaced TMF as the default term for the dreaded card brand blacklist.
If your merchant agreement's terminology is outdated, it's a good bet that your merchant agreement fails to account for other changes to card brand rules and technology that may fail to protect your business to the fullest extent possible, thereby exposing it to unnecessary risk.
Eugene Rome is the principal and founder of the Los Angeles-based law firm Rome & Associates. Reach him at firstname.lastname@example.org or 310-282-0690.
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