Merchant account early termination fees | How they work
Most every merchant account contract will include an early termination fee. The early termination fee is charged to the business if the business closes the account before the end of the contracted term. It is important to understand what the early termination fee is before accepting the terms of service from your merchant service provider. The early termination fee will be spelled out in the service agreement so be sure to review the contract before signing.
Important things to know about early termination fees:
- It can be negotiated
- It can be calculated multiple ways
- Be careful with refusal to pay
Negotiating your early termination fee
Some merchant service providers will allow for the early termination fee to be negotiated. Typically if you select an Independent Service Organization (ISO) to set up your merchant account the early termination fee is at the discretion of the sales representative. For example, if the business goes “out of business” it is reasonable to expect that the early termination fee to be waived. Make sure to have this conversation up front and get the agreed terms in writing.
Early termination calculation
The early termination fee can be a set amount, a prorated amount based on the remaining contract term or a combination of both. As an example we will use the following to illustrate how the early termination fee is calculated.
- 3 year contract term with the early termination fee equal to the greater of $250, or $35 multiplied by the number of months remaining in the then-current term.
- Contract approved 01/01/2011
- Termination on 04/01/2011
Early termination fee = $1,155 (33 months remaining X $35)
Be careful if you decide not to pay
It can be frustrating if you are charged an early termination fee for terminating a contract with a merchant service provider for a justified reason. It can seem unfair and unjust especially if you feel the service you were provided was unacceptable and you terminated to end a bad experience. It is commonly thought that a simple solution is to close the account for which the termination fee will be deducted from. I caution this approach as it allows for your provider to add your business to the terminated merchant file (TMF). The TMF is a file that represents businesses that have been banned by the industry. Once a business has been added to the TMF it is very difficult to get it retracted. Additionally, it makes it next to impossible to get a new merchant account set up.