28 May Volume Commitments in a Merchant Account Agreement
Unfortunately, some business owners enter into a merchant account agreement without understanding the terms they are agreeing to. This can backfire and lead to significantly higher discount rates and fees. One of the most important terms to consider when comparing merchant accounts is the volume commitment. This is especially important as most merchant accounts with a volume commitment clause has very low discount rates that may seem very tempting.
What is a Volume Commitment?
Some credit card processing agreements have a volume commitment that the merchant is required to meet. A volume commitment means the merchant must process X dollars per month. If this volume commitment is not met, the discount rate may be increased or the merchant may be hit with other financial penalties.
Note that the volume commitment refers only to the transactions processed through the company’s services, not the merchant’s total sales volume. As an example, assume a merchant agrees to a $200,000 annual volume commitment. If the merchant has an annual card volume of $150,000 but total sales volume of $1,200,000, the merchant still has not met the volume commitment and faces a penalty.
While fairly common, this type of clause can be very hard to meet for small and mid-sized businesses, as well as startups. Large or established businesses, on the other hand, may benefit from a realistic volume commitment they can meet in exchange for a very low discount rate.
A volume commitment should not be confused with the monthly minimum fee found with most merchant accounts. This is a standard fee that helps cover costs on dormant or inactive accounts.
Estimated Average Sales and Credit Card Volume
Every merchant will be asked to estimate average sales and monthly credit card volume, which helps the credit card processing company determine the merchant’s level of risk. It’s important for business owners to provide an accurate estimate. An estimate that is too low makes the merchant a higher risk, while an estimate that is too high may require additional paperwork.
This estimated volume can be helpful when comparing agreements for merchant accounts. Merchants who do choose a merchant account agreement with a volume commitment should understand the volume they must satisfy and the penalties for failing to do so.