Does Your Merchant Agreement Have an Auto Renewal Clause?
Ever been surprised by an automatic contract renewal? You know how awful it feels don’t you? You get this rage in the pit of your stomach that no amount of kicking and screaming can take care of. The worst part is that you end up feeling like you have no defense whatsoever. Why? The auto-renew clause is right there in the contract that you signed, even though it may be hidden better than a ninja assassin. And to think, all this time you were waiting for the contract to end so you could walk away. Sucks doesn’t it?
When it comes to the merchant account industry, auto-renewals are everywhere, especially with the big boys. What we don’t understand though, is that these larger processors think differently than you and I. They look at their bottom-line. It’s all about the numbers to them. It would be much more expensive for them to contact each merchant come renewal time, than it is to just let the contract automatically renew on its own. And, since most merchants are either too lazy or ignorant to follow the processor’s cancellation guidelines…jackpot!
Now, this wouldn’t be much of a problem if the processor communicated the auto renew clause more effectively. It wouldn’t be a problem if the contract just went to a month-to-month agreement like most cell phone companies, but that’s usually not the case with merchant account providers. There’s usually a set term which starts at about 1-year, and goes up from there.
Speaking of terms…
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What Are Typical Auto Renewal Terms?
They vary from provider to provider, but here’s the most common scenario. This is actually a snippet that I pulled from the TransFirst Merchant Services contract:
Term/Renewal. The initial term of this Merchant Agreement shall be for the term of three (3) years (the “Initial Term”) commencing on the date this Merchant Agreement is executed by authorized officers of Merchant Bank and Processor. At the expiration of the Initial Term, this Merchant Agreement will automatically renew for successive one (1) year periods (each a “Renewal Term” and collectively with the Initial Term the “Term”) unless a party provides the other parties with notice of its intent not to renew this Merchant Agreement at least ninety (90) days prior to the expiration of the then current term.
- 3-year term.
- Auto-renews for successive 1-year periods.
- You must cancel 90-days prior to 3-year term end.
Are Auto Renewal Contracts Illegal?
No. However, ever since the high profile case of Time, Inc. in 2005, many states in the U.S. have started placing regulations on how those automatic renewals need to be presented to the customer and/or enforced if necessary. Since these types of regulations are relatively new, it may take some time before your state moves forward on anything worth mentioning.
I’ll start adding to this section the states that are passing laws against auto renewals, so you can stay updated for your own sake. It’s possible that an auto-renewal clause by your provider is not compliant, thus rendering it null and void, so keep checking back periodically.
Are Auto Renewal Contracts Ethical?
Personally, I think they’re garbage. Don’t make me jump through hoops in order to leave your service. Actually, that should be a warning sign to anyone that’s thinking about working with a processor. Every merchant should ask their processor, “How hard will it be for me to leave you if I’m not satisfied with your service?”
What Should I Do If My Contract Auto Renews?
First thing you want to do is find out if the contract is enforceable. Visit the government website of the state in which the contract is bound. Usually it will be the state in which your merchant account provider resides, unless they operate in multiple states. Most contracts will have the state of compliance written directly in them.
Once you’re at that state’s government site, start a search for terms like “automatic renewal” or “auto renew.” If you don’t find anything, don’t give up. Try calling the secretary of state office to see if they can dig up anything for you on merchant account auto renewal. As I mentioned above, I’ll be adding info on each specific state, so that’ll save you some of the headache as well.
If you find out that your provider’s clause is not in compliance with state law, then be sure to bring it up to them. Provide written documentation if necessary. Chances are, you’ll be able to get out of your contract that way. Otherwise, you’ll either have to grin and bear it, or try and find a new provider that will hopefully pay the cost necessary to breach your contract.
My Two Cents
I have a wild idea for those of you that are still doing this auto-renew thing. How about you axe that policy and instead focus some manpower on keeping your merchants happy so you don’t have to trick them into spending an extra year (plus) with you?
People talk (sometimes important people), and the general consensus is that most of us don’t like auto-renewals, reverse-billing or opt-out schemes.
And, to the merchants reading this article, you no longer have the “ignorant” excuse, so please don’t sign a contract without checking to see if there’s an auto-renew clause in it.