Credit card processing companies charge early termination fees (ETFs) for a variety of reasons. First, they do so to recoup up front costs involved in setting up a merchant account. In a 3 year contract, for example, the processor may spread the up front costs it incurs over the life of the contract. If the merchant ends the account early, the processing company may not get these costs back.
In addition, the processing companies want to retain business accounts. Early termination fees are a deterrent for someone canceling an account. If the merchant has an offer for a slightly lower processing rate, the early termination fee may negate any savings received.
Common Methods of Calculating an ETF
Different processing companies charge different types of ETF’s. There is no standard early termination fee but there are common methods in which they are charged.
• Monthly fee based on length of the remaining contract- Some companies will multiply the months remaining on the contract by a set amount. For instance, if the merchant seeks to end the account with 12 months remaining, the company may charge $25.00 per month for each of those months. This creates an ETF of $300;
• Flat Fee- Other companies charge a flat fee. These companies are usually attempting to recover their start up costs. The fee will be the same if the merchant terminates the contract in month two or with a single month remaining;
• Lost Profit ETF- A few companies will calculate an ETF based on the profit lost in losing the account.
ETF’s in the Contract
To be enforceable, the ETF must be a part of the contract. It is a contract term, so it is important for the merchant to review and understand the entire contract before signing it. If an early termination fee is present, the method of calculating the ETF should be specified. Be wary of merchant accounts that merely state something to the effect: “the merchant agrees to pay an early termination fee if the contract is terminated prior to its term”. Because the amount of the ETF is not specified, the processing company can charge whatever it wants.
If the merchant is uncomfortable with the early termination fee clause, the contract should not be signed. It may be possible to negotiate with the company prior to signing the contract. Because the company is seeking the merchant’s business, the merchant may negotiate to waive the fee or specify different terms. As with any contract, make sure any changes to the merchant account are in writing and signed by both parties.