What Is An Early Termination Fee & Does Your Merchant Account Have One?

We’ve all done it–scrolled to the bottom of a user’s agreement and clicked I Agree or signed a paper contract without looking through the many pages of small print.

In the world of payment processing, new business owners are often presented with a long, difficult-to-understand contract by a pushy salesperson who insists that the contract wording can’t be changed. And while the best credit card processing companies won’t lock you into these types of deals, shady sellers might.

It’s only afterward you find that you didn’t get the best deal.

When you do find a better processor and decide to switch, you are told that, in order to break your contract, you have to pay an early termination fee. But what is an early termination fee (ETF), and how can you avoid paying it?

What Is An Early Termination Fee?

In the payment processing industry, ETFs are usually found in contracts with processors that have been in business for many decades (or their independent subcontractor salesforce). These processors set you up with a merchant account and, in return, you sign a multi-year contract. The contract typically lasts for an initial period of 36 months (3 years) and then the auto-renewal clause kicks in to lock you into another one-year term or goes month-to-month, basically forever, until you or they cancel.

Early termination fees come into play if you try to cancel the contract during the initial contract period. ETFs are usually discussed under the section of your contract called Term and Termination, Termination, or even Early Termination Fee. They’ll cover the specifics of the circumstances under which you or the processor can cancel the agreement and when any penalties (or ETFs) are applied.

If you find an ETF in your contract, treat it very carefully, especially if you also had to sign a personal guarantee for the contract.

How To Cancel Your Merchant Account Without Incurring An ETF

Since ETFs cost so much, is there a way to cancel the contract without having to pay an ETF? Yes, there is, but you have to follow the rules of canceling very carefully.

The key word in early termination fee is early. This means that if you cancel your contract before the end of the contract, you will probably have to pay an ETF. Conversely, if you cancel the contract when it naturally ends (and before it automatically renews), then you won’t have to pay an ETF.

Most contracts are pretty specific in describing how to cancel, so be sure to read your contract. Check any and all updates to the contract as well. The following is a general procedure you can follow:

1. Find out the precise date the contract ends. Finding this precise date can sometimes be a little confusing. With some of these contracts, the start date can be the date you signed the contract, the date the processor signed the contract, the date the processing service first started, or some other date specified on the application form. Usually, you can find the start date in the section called Term and Termination or similar. Once you find the start date, then count the length of the contract from that date to find the accurate end date. If your contract has automatically renewed, calculate the end date by taking the automatic renewal into account.
2. Find out how many days in advance of the end date you have to notify the processor that you wish to cancel. Usually, this information is found in the Term and Termination (or similar) section of the contract. This number varies by contract, so always check to make sure, but often it is 90 or 30 days in advance. Calendar the date so you don’t miss this very important window. It’s usually OK to send the notice a little bit early but not a little bit late.
3. Notify the processor. Be sure you notify the processor in the format they want (in writing), send it to the correct address (the official Notice Address in the contract), and send it through the proper carrier (e.g. first class US mail). You can find the official notice information typically near the end of the contract in a section called Notice. Follow the directions in this section exactly. If you usually deal with an account representative assigned to you, then you can certainly send this person a courtesy copy of your notice of cancellation, but it is not a substitute for the official notice.
4. Follow up and check bank statements to ensure no more fees are charged. Just because you sent your notices correctly doesn’t mean that the processing company followed its internal procedures correctly. The notice could get lost internally and they could still charge you after you have officially canceled your contract. This is why you should monitor your account closely after the official termination date to make sure you are no longer charged. If you are charged, send them the proof you canceled correctly and ask for them to refund the extra charges.

In addition to the above steps, there are a few items you should keep in mind as you terminate your existing contract.

How To Find A Merchant Account With No ETF

The world would be a very poor place if you always have to work with a complicated contract from an old-line processor just so you can take credit card payments. Fortunately, there are processors that employ newer business models and can offer you a merchant account with month-to-month billing and no ETF. We typically like these processors more than the ones with complicated contracts, and we have reviewed quite a few of them.

Most of these processors clearly state on their website that they do not charge an ETF. These processors include (among others) National Processing, Payment Depot, and Payline Data. In addition to no ETFs, hallmarks of these processors include transparent pricing, affordable hardware that can be bought outright, and great customer service. If you sign with these processors and then wish to leave, there are a few that might charge a small administrative fee of $20 for closing your account (e.g., Dharma Merchant Services). With others, you might have to wait until the end of a billing cycle and pay your monthly fee. On the whole and even with these small fees, these processors offer a much less painful way to end your business relationship with them.

Finally, sometimes, you might be able to negotiate a waiver of ETF with some processors. You have to negotiate this before you sign the contract, and there is usually a tradeoff. For instance, you may have to pay a higher processing rate or you may not get free hardware. If you do get a waiver, be sure to get it in writing and have it inserted in the agreement or your application for services. Otherwise, there is boilerplate language in most contracts that says all written or oral promises made before signing the agreement but are not in the agreement will not be honored.

For no ETF arrangements, merchant account providers are not your only option. You might wish to investigate third-party processors as well.

Look For Third-Party Processors With Pay-As-You-Go Billing

Instead of looking for merchant account providers, you might also consider third-party processors. These processors typically do not have ETFs. The three most popular of these third-party processors are Stripe, Square, and PayPal, and there are other white-label payments solutions bundled with software, if you look hard for them.

Third-party processors are able to offer merchants different deals because they have a slightly different business model. When you sign up with them, you don’t actually get your own dedicated merchant account, but this also allows you to start taking credit card payments right away. They typically offer flat-rate pricing of around 2.75% per swipe/dip/tap or 2.9% + $0.30 per online transaction. The price is pay-as-you go, with no monthly fees, and no ETF.

Before you sign with a third-party processor, be aware that there are also some negatives to working with them. One big complaint is that these processors are very risk-averse, so they can withhold payments to you or even suddenly terminate your account.

If you are just starting out and have a very low-volume business, these third-party processors are likely an excellent choice. Because they have no ETF, you can cancel at any time if you decide to graduate to a processor that can set you up with a dedicated merchant account.

There’s No Reason To Pay An Early Termination Fee

The business of credit card processing is changing quickly. These days, only the old-line established processors have long contracts with ETFs that penalize you for ending a contract early. Newer processors with different business models can offer you better deals, and you can easily shop around and avoid contracts with ETFs.

If you already have a contract with an ETF and wish to get out of the contract, you will have to read your contract carefully and follow some very specific steps to end the contract without paying the ETF. If the ETF amount is very high, it might be worth your time to contact a lawyer to help you find a safe way to end it without incurring any penalties. Look for a lawyer with commercial agreements or commercial litigation experience, and they should be able to help you with your contract.

Have you had to pay an ETF to get out of a payment processing contract? How was that experience?