Does Your Merchant Agreement Have An Auto Renewal Clause?
Merchant accounts can be a complex beast — hard to negotiate with and tough to understand. When a small business owner signs a contract agreement, they may be doing so in good faith, believing that what the salesperson said to them is reflected in the contract. Many times that’s not the case. What follows can be a frustrating, hair-raising experience that can leave even the most cool-headed among us feeling the overwhelm of a fight-or-flight stress response. I’m talking specifically about the auto-renewal clause, one crucial part of your contract that can rear its head later and cause extra fees and headache when a merchant tries to leave.
You only have to see the reviews of some of the most recognizable brands to see what I mean. (Costco Merchant Services and Bank of America, I’m looking in your direction.) Contract agreements are a major talking point when we’re considering scoring criteria here at Merchant Maverick. Sadly, contract issues often sneak under the radars of small business owners until it’s too late.
Automatic renewal clauses are anything but rare in the payments industry, so it’s worth understanding how to approach the whole thing when you’re considering your options. But take heart, by the end of this post, you’ll understand exactly what an auto-renewal clause is you can spot this reclusive beast before it takes you unaware.
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What Is An Auto-Renewal Clause In A Merchant Processing Agreement?
An auto-renewal clause in a merchant account agreement is a component of your agreement that is written into your contract and allows your merchant services provider to extend your original agreement and continue billing you, without requiring your re-approval. To put it another way, if you signed your contract and it has an auto-renewal clause, you’ll be on the hook for the next one, two, sometimes even three years if you don’t cancel within the window of time stipulated in your contract. Your window of opportunity is typically about 90 days before the end of your original contract agreement, but don’t expect them to send you a reminder notice.
Not all companies auto-renew for multiple years, however. Many also switch to a month-to-month payment processing agreement. We prefer month-to-month contracts over yearly ones in general, and we strongly urge merchants to read and understand their contract to understand the terms.
Here’s a snippet from the Vantiv merchant processing agreement terms and conditions that is not unlike many other agreements, and illustrates the point perfectly:
Following the end of any term, the Agreement automatically renews for periods of twelve (12) months (each a “Renewal Term”), unless either party gives written notice of its intent to terminate or not renew the Agreement at least 90 days before the then-current term expires. For clarity, termination of this Agreement does not terminate your equipment lease, if applicable.
Notice in the example above that you can’t just call or email, you must have your request in writing to be honored. Additionally, note that the agreement makes a distinction between your merchant account and an equipment lease agreement. Your equipment lease may be even more binding (and expensive).
While we’re focusing on early termination in regards to merchant accounts in this post, it’s worth mentioning that we strongly recommend purchasing equipment outright, or if that’s not possible, obtaining a small business loan which can save you money overall. That’s because lease agreements can be even bigger problems than merchant account agreements — buyer beware!
Let’s look at the real bane behind the auto-renewal clause — early termination fees (ETF).
Beware The Early Termination Fee
So what happens if your business situation changes or you absolutely hate your service and want to get out? If you choose to break your payment processing agreement after it automatically renews, you can face multiple fees for cancellation, including the early termination fee, or ETF. This often means you’ll pay anywhere from $100 to $500 to cancel your contract, though $300 is the average. The worst processing companies have a liquidated damages provision instead of an ETF — meaning they can charge a portion, up to the full amount, of the fees they would have made on the contract if you had let it play out for the full term.
To make matters worse, many companies are also notorious for giving merchants the runaround, conveniently kicking the can to the next billing cycle and charging merchants for services they aren’t even using.
Not all companies are this strict (or shady) with the early termination fee, however. Depending on your circumstances (and your merchant account provider) you may successfully get this fee waived even if it’s in your contract. However, if you’re savvy enough to notice the ETF before signing on the line, you can certainly negotiate to have it removed or adjusted. While you may not get the renewal clause completely removed, you may be able to remove the early termination fee from your agreement— and that’s a win!
The Step-By-Step Guide To Avoiding The Auto-Renewal Clause
Have you decided you don’t want to be trapped by the auto-renewal clause? It’s possible to get what you want in your contract. You just need to understand how to navigate the agreement and get control. Remember, you’re ultimately in control of what company you do business with, so if they don’t want to be flexible, that’s their loss. Don’t settle for less!
Here are six steps to help you avoid the expense of the auto-renewal clause and keep control where it belongs—with you!
- Read your contract. I know, I know. You’re busy, and the salesperson is likely trying to whisk you from this step to the next quickly. It’s easy to take their word for it and just sign the agreement, but don’t. Insist on perusing the contract. Grab some coffee, and take your time. Take note of how long your agreement is and pay special attention to the cancellation procedure as well. You’ll learn everything you need to know about how easy it is to leave right from your contract.
- Know who your processor is. You can’t cancel if you don’t know who your processor is, because that’s who you need to contact, not your sales rep. In some cases, the company you think you’re signing up with isn’t providing your processing services. Additionally, your sales rep may or may not be employed with the merchant account provider. Find out what company is processing your payments (and do some research on them, too). It’s this company that will be handling your money behind the scenes. You can also find the information about your processor in your contract.
- Know how to reach your merchant account provider. Knowing who your processor is vital when you need to reach them, especially when it comes to canceling your agreement in the appropriate window of time. Additionally, understanding who is providing customer service, technical support, and how to reach these folks is so important to ensure you aren’t stranded when you need help the most. The protocol for who you need to reach (and how) as far as terminating your agreement is in your contract, too.
- Submit your request in writing. What’s disheartening is that you can call and email and tell a support rep that you want to cancel your account, but because these cancellation requests must be in writing, they may not honor your request. Yes, it’s frustrating, but the phone rep can’t actually do anything to cancel your account even if you give them permission. You can browse any review sites for some of these larger banks and see what I mean. If your contract states cancellation must be in writing, you can be sure that’s exactly what you’ll have to do to make any headway. And you also need to make sure you submit your request in the correct time frame.
- Return your equipment. To ensure your clean exit, you’ll also need to return any “free” equipment in a timely fashion. If it were me, I’d purchase the additional tracking, confirmation of delivery, and insurance. You never can be too careful. Keep in mind that this exit strategy does not work if you’ve leased equipment. That’s an entirely separate agreement and one that can get very expensive. (See the section above wherein I warn against such leasing setups.)
- Monitor your bank statements. This step is probably the most frustrating in the breakup process. You’ve said it’s over, and yet, they keep charging you monthly fees for your merchant account. Yes, it happens. Monitor your bank statements carefully for the next few months. Beyond being charged for the billing cycle during which you were active, you shouldn’t see any new charges. Call, follow up, send a letter, and repeat until they’ve resolved the issue for you.
How To Skip The Multi-Year Contract Altogether
If you’re like many merchants, you may want to avoid the dance of negotiation altogether.
Well, good news! There are plenty of third-party processors (such as Square, Stripe, and Shopify to name a few) and merchant accounts with no commitment requirements! That means that whenever you want to leave, you won’t need to worry about finagling out of a long-term agreement that doesn’t suit you anymore. These companies operate on month-to-month agreements, or are sometimes entirely “pay-as-you-go,” meaning the only fees you pay are on the transactions you process.
In fact, all of the top companies we recommend at Merchant Maverick operate on a month-to-month basis with zero early termination fees. Take a look at some of your best options as far as contracts and pricing transparency with our credit card processing comparison chart, and check out what’s out there!
Don’t Get Trapped In A Vicious Cycle of Auto-Renewals
If you’ve ever been surprised by an auto-renewing contract, you know how terrible it feels. You may have already chosen a different processor, gotten devices, and be ready to move on, only to be stuck in a truly vicious cycle with no end in sight.
If you’re a small business owner who is shopping around, by now we’ve armed you with enough information to avoid being trapped into multiple-year contracts. However, we hope we’ve also shown you that you don’t have to settle for any aspect of a merchant account. There is a whole world out there of companies that have proven themselves flexible and easy to work with and that provide a high level of value to the merchants who trust them. So never accept less than exactly what you need.
Do you have an experience you’d like to share with us? Have questions about auto-renewing contracts, early termination fees, or merchant accounts in general? Let us know in the comments below.
Emily Hale
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Our company has been held hostage in an auto-renewal contract with a trash disposal company since 2001……………..yes, 18 YEARS! During that time, our rate has increased by 10% per year, so you can imagine how high it has become at this point. Phone calls to them to discuss some kind of price reduction were met with a swift reminder that they are operating under the terms of the contract and NO, there’s nothing that can/will be done about it. The auto-renewal clause locks us into 3 year terms, and with employee turnover in the accounting department, we have not been able to “catch” the small window of opportunity to cancel the contract. And like you mentioned, they require cancellation notices to be sent on company letterhead, via certified mail, between 60-120 prior to the end of the current term. Finally we were able to submit the cancellation notice following all of the various rules they dictated and our time with them is coming to an end. Now, of course, they’re offering all kinds of discounts, promotions & incentives to entice us to stay. Unfortunately, this experience has left such a bitter taste in our mouth, that we are no longer willing to work with them, under any conditions. But my question is this……………is there anything illegal about what they’ve done – auto-renewing us for 18 years? Was there anything else we could have done?
Hi, Sherry! Wow, that sounds like a very frustrating cycle. Despite the length of time, there would likely not be anything you could do from a legal standpoint since the terms were laid out in the contract, and nothing was broken as far as that goes. Unfortunately, that is the nature of how frustrating these things can be. In situations that arise where the merchant account provider was unresponsive or in your case, you keep missing your window, what we recommend is to escalate the issue in a way by making complaints with the BBB or other review sites. Because that is your right to do so, and because it often gives them a little more incentive to respond and repair their reputation. Of course, I am speaking in general terms, so your situation may vary. I’m glad to hear that you were finally able to leave your contract. This Merchant Account Comparison page may help you find a better option. Best of luck on finding a better company that offers more flexible terms.
Can anyone help with California? It was a contract signed in 2013! They’ve renewed every year. I know, I should have “known,” but just recently tried to cancel and they threatened with early cancellation fee.
Hi E,
That is the unfortunate thing about auto-renewal clauses. They do and can renew without your approval, and companies often don’t go out of the way to remind you, either. Your best bet is to take a look at your merchant agreement and follow the steps of cancellation outlined in this post. You can ask the company to waive the fee, but unfortunately that is up to their discretion. Best of luck!
Does anyone know what happens when you live in New York, but the company(United States Bankcard service) you signed a contract in is California. The company they use to process your money (Global Payments) is in Maryland. So which state do you use?
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most likely there is a clause in the contract stating that any dispute is to be settled in a specific state. read the contract. if not then it would be n the state where the dispute is filed with the court.
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is auto renewal enforceable in Colorado? and in Utah? Can you also find out about New York
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Florida’s Statue is 501.165
http://www.leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0500-0599/0501/Sections/0501.165.html
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Wisconsin passed a statute requiring certain disclosures and notices in some business contracts. Does non-specific language such as “30 days prior thereto” fulfill the Date of the Deadline disclosure requirement? Or must a contract disclose the Date of the Deadline written as a specific date i.e. December 31, 2014? Are auto renewals with the non-specific language enforceable under the Wisconsin statute?
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Please sign my petition to make “automatic renewals” illegal. http://www.thepetitionsite.com/888/669/102/demand-an-end-to-automatic-renewals/?z00m=22383501&redirectID=
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Do you know any details regarding the requirements/validity of automatic renewal clauses in MA?
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Write to your legislators!!!!
See below article:
The state of Florida passed a new bill affecting automatic renewal of contracts. Under House Bill 751, titled, An act relating to automatic renewal of service contracts, service providers must include a clear and conspicuous clause in the contract specifying the terms of the automatic renewal, as well as give notice — between 30 and 60 days prior — that the contract will self-renew.
This statute was signed by Florida governor, Charlie Crist, on May 12, 2010 and will affect all contracts entered into on or after July 1, 2010. As Ken Kirschenbaum of Kirschenbaum & Kirschenbaum, P.C., Garden City, N.Y., points out in a recent newsletter, the bill exempts business subscribers, but also all renewals of up to one month, which he suggests sellers should consider as a safe bet in light of similar statutes passed and likely to pass across the United States.
At least 10 other states have passed or amended similar legislation in the past four years and ESA director of government relations, John Chwat says we will see many more follow suit. “I’m following about 23 to 24 [proposed bills] at the moment. Some have not passed this session but some are still active.” With all 50 state legislatures meeting in 2011, Chwat predicts those 23 or 24 bills could grow significantly. “It’s a big and popular issue in consumer protection at the state legislature level. And we haven’t seen the end of it.”
In addition to Florida, states with similar, enacted, automatic renewal legislation include Arkansas, Connecticut, Illinois, New Mexico, North Carolina, New York, Pennsylvania, Tennessee and Utah.
Of those states looking to pass anti-automatic renewal statutes, Tennessee, which currently has legislation stating automatic renewal on residential alarm contracts is permitted up to one year, is notable for drafting bills specifically targeting alarm system contractors. Senate Bill 1476 and House Bill 0786, which were opposed this session, would disallow automatic renewal clauses altogether, as well as impose other requirements on alarm system contracts.
Bob Worthy, who as Legislative Committee chairman for the Alarm Association of Florida worked very closely with the new Florida statute, saw it develop from a potentially challenging legislative proposition to a manageable regulation. “It all boils down to education; a lot of states don’t have strong alarm associations to warn legislators as to possible pitfalls,” Worthy said. “We came out probably better off than a lot of states that passed bills with no industry representation.”
Last year, the California Alarm Association (CAA) was able to secure an exemption from Senate Bill 340, which requires a conspicuous clause and specific approval from the subscriber on automatic renewal bids. According to an ESA press release, the CAA argued that the alarm industry is already regulated by Alarm Act statutes and the Department of Consumer Affairs via the Bureau of Security and Investigative Services. CAA also proposed that the alarm industry requires special consideration as automatic renewal of contracts ensures subscribers’ “safety and well-being.”
“This is a significant victory because the legislature has now recognized that there are unique circumstances regarding alarm contracts and we will be able to cite the exemption in future legislative debates in other states,” reads the release.
On the other side of the legislative coin, New York Senate Bill 7230, which would amend a previous law requiring notice of automatic renewal by certified mail, was referred to the Judiciary Committee March 24, 2010. The bill is particular to electronic and life safety alarm services and says that payment by a subscriber after a contract has expired acknowledges the extension of that contract and fulfills the notice requirements of the law already in place. This bill, as well as the California exemption, is the result of very active lobbying, according to Chwat.
“This fall, everyone should be aware of these types of bills coming down the pipe,” Chwat advises. “If they’re not going to take a proactive stance like New York has, states should seek to get exemption like California.”
Bob Ireland, president of the Alarm Association of Florida, advises, “All sides need to work together keeping an open mind about new legislation.” He stresses that whatever the law, “Every company should make it very clear to their client what the terms and conditions of the contract are — including what the renewal clause is.” ESA and Kirschenbaum agreed, in their respective literature, that maintaining open communication with consumers is key in avoiding negative repercussions from these statutes.
For information on automatic renewal statutes state by state, visit http://www.kirschenbaumesq.com/autorenewal.htm
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These auto renewal clauses DO NOT COMPLY with Contract law. Where are these politicians who are supposed to oppose these contract provisions? Bet they are too busy cozying up with the the corporate world violating our rights!
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My state has made provisions protecting merchants from this practice. It was enacted in July of 2013. One of the last lines of the state document states: “This Act shall become effective on July 1, 2013, and shall apply only to contracts entered into on or after that date. I entered into my contract in 2010, but it auto-renewed in December of 2013.
So where do I stand? Is this enforceable in my case because the contract auto-renewed after the effective date of the state law? Or is it not – because the original contract was signed back in 2010?
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Hi Craig,
Based on similar circumstances I’ve seen, the effective date of the law would have to predate the agreement for you to be legally absolved here. (Disclosure – I’m not a lawyer and this is not legal advice!) But if you take it up with the BBB, you can usually get the early termination fee waived or at least partially waived.
Good luck to you, and please come back to browse our favorite providers (who do not use early termination fees).
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I think CA SB340 might work!
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Doesn’t ACT 192 – 2009 Senate Bill 190 void these extensions for all states?
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There are 5 parts of a contract
Offer
Acceptance
Consideration
CAPACITY OF THE PARTIES-MEETING OF THE MINDS
Legality
Now which 3 parts does Auto renewal violate, one,four and Five
Meeting of the minds stand out, how can you agree to a contract in the future when you might not even exist. What happens when you agree at a certain price, and when thy renew they raise the price 10 fold! I am going to see what the New Federal office of Consumer Protection (CFPB) can do to end it. It seems the FTC, does nothing for the consumer.
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Hello!
Since you mentioned looking at laws in each state that may make these types of contracts enforceable, have you had a chance to review Minnesota? And if yes, will you please share with me?
Looking at a five year contract signed in 2007 that NOW has renewed itself for five more years. What a hit. As you mentioned…Now I know. Had no idea this was even possible.
Thanks,
Jen H
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Jen,
Unfortunately I don’t know the laws in Minnesota. I’m sure you can find out that information by contacting your state attorney general.
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