An early termination fee in credit card processing is an extra charge that a merchant gets for cancelling their merchant account prior to the termination date set in their contract.
The design of early termination fees is to discourage merchants from leaving. It is supposed to reduce churn. All payment processors want to make a profit and they think these fees may help retain customers. Unfortunately, many times the early termination fees come as a surprise to merchants once they try to switch payment processors. This is because some payment processors are not completely transparent with their fees and keep them in the fine print.
All in all, we think early termination fees have the reverse effect in retaining customers. This article is to give a little education on early termination fees and how to avoid them.
What is churn in payment processing?
Churn, also known as attrition, is the number of customers who leave a payment processor over a given time period. Churn can also be represented as a percentage which is the number of customers that left over a time period divided by the total number of customers at the beginning of that time period.
Customers leaving a business is expected, however when the churn rate becomes too high, it impacts the ability to grow or even sustain. To look at an example of churn rates, Netflix has some customer churn, but is quite low at 2.5% per year. It is thought in the tech industry that anything below 7% churn rate annually is very good.
In payment processing, the industry average for churn is over 20%. Some of these customers leave due to poor service, however it is also important to note that much of the churn comes from “new businesses” that signed up for a merchant account then went out of business.
The cost of early termination fees in payments
Not all payment processors have early termination fees. The good payment processors have no termination fee at all. However, when there is an early termination fee, it is generally a flat fee that ranges from $250 to $500.
There is also the possibility of a liquidated damages termination fee. This is a fee that is based on the estimated revenue that the payment processor would have received had the contract been completed. Sometimes these fees can be ridiculously high. For example, if you were expected to bring $5000 in fees to the payment processor per year and you have two years left, the fee could be $10,000. That’s insanity.
Your contract could have a $500 flat cancellation fee in addition to a liquidated damages fee. This is why it is so important to review your contract before you sign. Keep in mind, the best payment processors, like TCM, will have zero termination fees.
How to get out of early termination fees
The best way to get out of paying an early termination fee is to negotiate with your processor. This may not be easy, but it’s the best way. Prior to doing that, get to know your facts by reviewing your contract and key dates. TCM sometimes helps merchants with advice on how to get out of paying an early termination fee. Give us a call if you want to chat about it.
If you have been misled, you may also want to review Canada’s code of conduct. Canada implemented a Code of Conduct for payment processors that started in 2010. It is designed to get rid of poor or unfair industry practices. A good start is to review Canada’s Code of Conduct for the Credit and Debit Card Industry. It is possible to file a complaint to the code of conduct who may be able to help further.
Things to do before signing a payments contract
Here are a few key items you should do prior to signing a contract for your merchant account. It can be a pain to dig into these details, but it will pay off in the future.
- Read the fine print in your contract
- Review all essential dates
- Get all promises on email (verbal is not enough)
- Review your first statement to ensure all is expected
- Read online reviews of the payment processor
After you you do these few steps, you are likely in great shape to sign you contract for a merchant account.
Final thoughts on termination fees
Payment processors come in all shapes and sizes. It is important to understand the bigger does not equal better in payments. Never feel pressure to sign a contract. Take your time and do online research. Even if you only check out the Google reviews of your potential payment processor, you’ll get a good sense on their customer service. Never settle for anything below a 4 out of 5 stars.
