Does Your Merchant Account Have An Early Termination Fee?

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. We know it’s wrong, but we’re busy and the print is so small…and we are thankfully often protected by consumer protection laws that work quietly in the background. Once you’re a business owner, however, many of the consumer protection laws go away because you are now a sophisticated party who is presumed to know better and can negotiate contracts better.

This, of course, is not the reality. 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. But that’s okay, they assure you. You got a great deal.

Only afterwards do you find that you didn’t get the best deal. When you do find a better processor and decide to switch, you are now 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?

Most of us have dealt with ETFs before. We sign a cell phone, cable, or apartment lease for x months and, in order to get out of the contract early, we have to pay an extra fee–the early termination fee. As a consumer, the fee might be capped by law, but as a business, you might be on the hook for more.

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 automatically renews for additional one-year terms or go to month-to-month, basically forever until you or they cancel.

Early termination fees come into play if you want 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.

Sometimes, the ETF is just a flat fee, but other times the processor claims it needs the ETF to recoup the cost of setting up your account and programming your equipment. In this case, they’ll require you to pay all (or a portion of) the fees they expect to make from you during the entire term of the contract. The technical term for this is liquidated damages and it’s one of our least favorite things to see in any contract.

If you also lease point of sale terminals and similar equipment from the processor, then your hardware is usually covered under a separate agreement that is not affected by your processing contract. (You can avoid an equipment lease by taking out a small business loan to buy the equipment outright. We have an excellent article on the horrors of equipment leases and how to avoid them.)

One last general comment about ETFs. Quite a few of the big processors make you personally guarantee the contract. This means that even if you have formed a corporation to limit your personal liability from the risk of doing business, they can skip suing your business and come after you personally for the ETF.

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 Much Do ETFs Cost?

Based on our experience, ETFs usually cost about $295 to $495, and sometimes that number is per store location. If your contract has a liquidated damages provision instead of a flat fee, it can also be calculated on a sliding scale, looking at how many months you have left on your contract multiplied by how much you usually pay per month based on your typical volume of business. If your ETF is based on this sliding scale and you are early in your multi-year contract, you might end up paying thousands of dollars.

And again, if you have an equipment lease, then you might have to pay an additional ETF for that contract. One number we’ve seen is up to $775 per device. Note that the equipment lease is generally not a part of the main processing agreement, so these ETFs are separately calculated and then added together. However, some processors work with leasing companies that use non-cancellable leases. In this case, even if you cancel your processing contract, you cannot end the lease agreement before its term — at least not without paying off the entirety of the contract. A bad lease can leave you paying double or even triple the value of equipment you won’t even own outright.

So, assuming you find that there is an ETF in your contract and it costs you quite a bit to cancel, is there a way to get out of the contract without paying the ETF?

Maybe.

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 their 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.

Additional Considerations: Equipment Leases

If you have an equipment lease, you will have to follow the above procedure for the equipment lease as well. Do not assume that they are the same. If the equipment lease agreement has a section on returning the equipment or having to pay to purchase, think through this section so you understand the implications of canceling that lease. You might end up having to pay for the equipment in one lump sum on the date of cancellation.

Again, follow the cancellation steps outlined in the contract precisely, and follow up to make sure the equipment has been returned and you are no longer billed for them.

Remember that in a worst-case scenario, the equipment lease might be non-cancellable. You’ll be stuck paying the entire value of the contract. That’s why leasing is the worst option for acquiring hardware. Buying outright is always preferable, even if it means a larger upfront investment.

Additional Considerations: Initial Term VS Renewal Term

Sometimes, there is a difference in cancellation procedure between the Initial Term and the Renewal Term. In one contract we reviewed for this article, while there is an ETF for the Initial Term, there is no ETF for Renewal Terms as long as the processor is properly notified 90 days in advance.

Additional Considerations: Price Hikes During Term Of Contract

In one or two of the contracts we reviewed for this article, there is an alternate way to cancel the agreement. If the payment processor raises its price of service, it sometimes will allow you a small window, such as 30 days, to cancel. Usually, these disclosures are included in your monthly statement. You might not be contracted directly to be informed of the changes, so be sure you check your statements on a regular basis and watch for any notices included in them.

If your processor raises its price, if this provision is in your contract, and if you want to take advantage of this small window, be sure to follow the procedures precisely. If you cancel late, then you might be deemed to have accepted the price increase and the window for cancellation closes. Again, the equipment lease agreement is likely treated differently, so you should analyze this option carefully before using it.

Additional Considerations: Business Solution For Avoiding ETF

Lastly, is it possible to get out of an ETF through a business solution? Maybe.

Some salespeople promise you the world but once you sign, they deliver nothing. Sometimes, a salesperson “forgets” to tell you about the various fees you have to pay every month. Or maybe your equipment never worked correctly even after you called tech support multiple times.

If you have every contact attempt and every failed solution properly documented and then you talk to your salesperson’s boss or boss’s boss, the processor may let you out of the contract without having to pay the ETF. Business solutions are highly dependent on the facts and the individuals handling the matter, so you probably shouldn’t count on this one to always work. Occasionally, escalating the complaint to the Better Business Bureau can help in getting a response and a refund, but again, there’s no guarantee of a happy resolution to the issue.

Assuming you are successful in canceling your existing contract without paying a huge amount of ETF, are there processors out there who offer no ETF?

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 (e.g., Fattmerchant). 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 in 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 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?