Early Termination Fees in Merchant Contracts

Two kinds of exit fees

Merchant agreements usually use one of two approaches when you leave early.

A flat early termination fee. A single charge, commonly a few hundred dollars, whenever you close the account before the term ends. It is easy to plan around and often negotiable.

Liquidated damages. A formula that estimates what the processor would have earned had you stayed. A typical version multiplies your average monthly processing fees, or the processor's average monthly revenue from your account, by the number of months left.

The difference between the two can be large. Consider an account where the processor earns about $420 a month:

If your agreement uses liquidated damages, timing matters. Leaving close to the end of a term costs far less than leaving in the first year.

Automatic renewal

Many agreements start with a term of one to three years and then renew automatically, often for one year at a time. To avoid renewing, you have to send notice during a window, which may be 30 to 90 days before the renewal date.

Miss the window and the clock resets. A business that signed a three-year agreement and forgot about it can find itself in year five with a fresh renewal and a fresh termination fee.

Put the renewal date and the notice window on your calendar the day you find them.

Where to find the terms

Your signed merchant application is usually only a few pages. It typically refers to a longer document, often called the terms and conditions or the program guide, which holds most of the rules on fees, term, renewal, and termination. That document is part of your agreement even if you never saw it.

Ask your processor in writing for:

1. A copy of your signed merchant application.
2. The version of the terms and conditions or program guide that applies to your account.
3. Your contract start date, current term end date, and renewal terms.
4. The exact early termination fee or liquidated damages formula that would apply today.

Look also for a clause about price changes. Some agreements let you leave without a termination fee within a set number of days after the processor raises your fees. If you received a pricing notice recently, read that clause closely.

How to leave a processor cleanly

1. Confirm your term, renewal date, and exit fee using the documents above.
2. Open your new merchant account first. Get approved, set up your terminal or online checkout, and run test transactions.
3. Move your recurring payments and saved cards. Ask both processors how card-on-file data can be transferred securely, if your business uses it.
4. Send written notice to the address and in the form your agreement requires. Email plus certified mail creates a clear record.
5. Expect a reserve period. Some processors hold back funds for a period after closing to cover late chargebacks and refunds.
6. Watch your bank account and final statements for the termination fee and any closing charges. Compare them against what the agreement allows.

If you also lease a terminal, that is a separate contract with its own terms. Handle it using the steps in credit card terminal leases.

Reducing or avoiding the fee

• Ask your current processor to waive it. It may agree, especially if you have been a customer for years or if it raised your prices.
• Ask your new processor to cover it. Many processors offer to reimburse a termination fee up to a set amount to win your business. Get the offer in writing, including how and when it pays.
• Use the price-change clause if your agreement has one and your fees went up.
• Time your exit to the end of the term or the renewal window if the fee is large.

Leaving may not be necessary at all. A prepared request to your current processor often gets a better rate without switching. Our plan for negotiating lower processing fees shows how.