by Matt Rej
Signing a contract is a standard onboarding step when a business gets set up to accept credit card payments with a processor.
But a three-letter variation of the contract name can immediately determine whether you’re paying higher rates. All before you process a single card.
If you signed a sub-merchant agreement instead of a merchant agreement, this is for you. It’s also helpful for anyone who’s been presented with a sub-merchant agreement but hasn’t signed yet.
What it Means to Process Payments Under a Sub-Merchant Agreement
A sub-merchant agreement is a payment processing contract between a business (the sub-merchant) and a Payment Facilitator (PayFac) or Payment Service Provider (PSP).
Unlike a traditional merchant account where the business has a direct relationship with the acquiring bank, a sub-merchant agreement means the PayFac has full control over the backend acquiring relationship.
It may seem like a minor or unimportant detail, but from the merchant’s perspective, this means:
- There’s a middleman sitting between you and the actual backend processor.
- The PayFac holds the master merchant account.
- You’re onboarded under the PayFac’s umbrella and don’t have a traditional merchant ID (MID).
Many businesses overlook these nuances due to the perceived simplicity and faster onboarding, as they don’t have to go through a lengthy underwriting process directly with an acquiring bank.
But few realize that this structure trades long-term processing costs for short-term convenience. And that trade shows up on every single statement moving forward.
Extra Markups on PayFac Pricing
To truly understand why sub-merchant agreement pricing is so much more expensive than a direct agreement, you need to know what’s happening behind the scenes whenever you accept a card.
Every single transaction carries a non-negotiable interchange rate set by the card networks (Visa, Mastercard, etc.). These are wholesale rates paid directly to the issuing banks, based on factors like card type, transaction environment, and industry (among others).
From there, the acquiring bank adds their own markup for their role in processing the sale. And if you had a direct merchant agreement, then you’d be negotiating this markup with the acquirer.
But as a sub-merchant, your contract is with the PayFac. They hold the master merchant account with the acquiring bank, and you have zero control over their agreement.
Now the PayFac sets your pricing, which is always going to be inflated. Because your fees need to be set high enough to ensure the PayFac can pay the interchange rates and acquirer markup while still profiting on top of that.
The PayFac takes on all of the risk here, too. They’re on the hook with the acquirer for any fraud or chargeback costs. Which means they also need to have enough cash on hand to pay those forced reversals when they come up.
That’s also factored into your rate, even if your business isn’t inherently risky. You’re paying more to potentially cover risks associated with other sub-merchants all under the same master account.
Software Costs Built Into Your Processing Rate
Many sub-merchant agreements today come bundled with another software, like a POS solution, practice management software, PMS, ERP, or another industry-specific tool.
And what happens here is that your payment processing costs end up subsidizing the software subscription.
Merchants think they’re getting cheap or reasonably-priced software because $50 or $150 per month looks good for a necessary tool. Especially when that subscription includes payment processing built-in.
But the software provider knows they can profit from your processing volume, and the monthly software revenue is almost secondary for them.
This type of sub-merchant agreement setup can be presented in several different ways depending on the setup.
For example, some offer an all-in-one solution with software, hardware, and processing from a single provider (like Toast and Square). Other platforms offer their own branded payment solution that’s actually a PayFac.
But at the end of the day, if you sign a sub-merchant agreement through a POS or software provider you’re dealing with all the downsides discussed above plus the added software cost component. So your rates are going to be even higher.
How Sub-Merchant Agreements Hide True Costs
The short answer is lack of transparency.
When you sign a direct merchant agreement with interchange-plus pricing, the acquiring bank sends you a full breakdown of every network-imposed fee passed through at cost. Then the processor’s margin is shown on top of that.
So you can look through your statement line-by-line to see what costs are mandatory vs. what can be negotiated with your processor.
But a typical PayFac isn’t going to show you this information if you’ve signed a sub-merchant agreement.
They might be charging you upwards of 3.5% + $0.30 on every transaction, when the true underlying cost is 1.85% + $0.10. You have no way of knowing this because everything is bundled into a single rate.
Some sub-merchant agreements may name the backend acquirer somewhere in the contract if you know where to look.
For example, let’s say you use WorkWave’s field service management software. If you want payment processing built in, you’ll sign a sub-merchant agreement with WorkWave Payments, which says that the backend acquirer is either Worldpay or Adyen.
Even though one of these two providers is technically processing your payments on the backend, you have zero relationship with them. You can’t call them and ask them to send you a breakdown of your interchange costs.
Everything runs through the PayFac, which in this case is WorkWave Payments. And the statement they send you will just be a few lines showing your bundled rate for everything, which we’ve seen as high as 3.20% + $0.30 per transaction.
This is not a knock on WorkWave. There are literally thousands of setups exactly like this, and businesses just don’t realize what they’re getting into.
Can You Get Interchange-Plus Pricing as a Sub-Merchant?
Yes, but it’s not standard or common.
The vast majority of PayFacs or aggregators offer flat-rate pricing by default, and few advertise IC+ pricing even if they do offer it.
But interchange-plus is often reserved for high-volume and low-risk businesses.
Even if you do convince your PayFac to give you interchange-plus pricing, the markup will still be significantly higher because of the underlying setup. They still control the master merchant account and have a direct relationship with the acquiring bank.
So your rate still needs to be set high enough to pay the acquirer.
Under a sub-merchant agreement, your PayFac may set your IC+ rate at say 60 bps whereas if you had a direct merchant agreement the IC+ markup could be 20 bps.
Common Contract Clauses in Sub-Merchant Agreements
While every sub-merchant agreement is going to be unique to the provider offering it, most of these are 80% boilerplate that contain similar clauses.
Some have nothing to do with your actual rate, but they still end up being an expensive consequence for your business.
- Rolling Reserves: Percentage of each deposit (typically 5-10%) gets held back for a set period (90-180 days), then gets released on a rolling basis. So your money is effectively working as the PayFac’s risk cushion.
- Upfront of Fixed Reserve: A lump sum of cash is held at onboarding or after a triggered event, separately from the rolling percentage.
- Discretionary Holds: Most agreements let the PayFac hold funds whenever it sees “elevated risk” without actually defining what that means. Any volume spike, large ticket, disputes, or change in what you sell can trigger this.
- Account Freeze: Full stop on payouts, usually during an account review with no deadline to release the funds. (Stripe is notorious for this).
- Payout Timing Delays: This covers the standard settlement schedule and the PayFac’s right to change or delay individual payments.
- Instant or Accelerated Payouts: Faster access to your own money costs extra, typically as a percentage of the payout amount.
- Post-Termination Holds: Even if you close the account, the PayFac can keep reserves for months to cover chargebacks that come later.
To be clear, even traditional merchant agreements can include many of these clauses.
But the difference here is that a PayFac often applies these terms with stricter triggers compared to an acquiring bank because the PayFac is less risk-adverse.
When you go through the underwriting process with an acquirer, they do a deep dive into your business and set your rates/terms accordingly based on your risk profile.
Since a sub-merchant doesn’t have the same onboarding standards, they default to stricter terms for everyone.
How Sub Merchants Can Still Negotiate Lower Credit Card Processing Fees
If you’ve sent a sub-merchant agreement but haven’t signed it yet, my best advice is to hold off. This scenario is common for either new businesses trying to get started ASAP or an existing business that wants integrated processing through a software provider.
For new businesses, take the time to go through full underwriting with a direct acquirer, even if it means you have to wait a week to accept cards. The long-term savings will be worth it.
And for merchants looking for an integration, you’re almost always better off just keeping your current provider if it’s a direct agreement.
For those of you who are already using a sub-merchant agreement and finally realized that you’re paying too much, the solution here may surprise you. As terminating the account and switching to a direct acquirer usually isn’t the best move.
Instead, you can leverage your knowledge about the sub-merchant agreement to negotiate better terms directly with your PayFac.
Whether that’s a lower flat rate, a switch to IC+ pricing, fees removed, or a combination of things, you can often save money on processing without changing anything. Even as a sub-merchant.
If you’re not sure where to start or which fees you have the best chance of negotiating, we can help. Our team can review your statements and contract, then help you get a cheaper rate directly with your current provider.