Merchant Account Cancellation Fees

It is a standard practice in the industry to charge an early termination fee. This is understandable - considerable time and effort goes into underwriting and boarding a new account, time is spent on customer service, etc. An early termination fee is a way for a merchant account provider to make sure they will recoup their initial investment into a new merchant account. These fees are usually range from $200 - $500 depending on the provider.

However, some entities enact extremely unethical early termination fees.

For example, some merchant account providers will charge a mutliple on the earnings from the largest volume month over the past 12 months. Some providers will go so far as charge a multiple on their profit + interchange + dues and assessments!

Two examples that I have encountered:

1) Big Bank - I had a merchant processing with this bank. They wanted to cancel, and were prepared to pay what they thought was a $295 early termination fee. They receive a communication from the bank telling them their early termination fee was $60,000+!!! WOW! This was their highest month from the past 12 months, including interchange + dues + assessments + the bank's profits.

2) Merchant Account Provider - Similar scenario - very small merchant, tried to cancel and the provider threatened to assess an $18,000+ cancellation fee. WOW!

In both cases, these organizations were assessing against future earnings (i.e. no loss was represented to these organizations) and future earnings they never would have earned (i.e. interchange + dues + assessments)

This practice is BAD!! Obviously. Here's why:
1) It is, in my opinion, an extremely unethical practice. It is unfair to the merchant, and it's this type of action that makes merchants at large hate merchant account providers. It is bad for the industry as a whole.
2) Similar scenarios caused legislation in Arizona to be passed putting a $50 cap on early termination fees. This type of action will invite government regulation.
3) This type of action does not help the provider in the long run - it ends up causing attrition, instead of preventing it, and ends up with a customer who will never come back.

So, my message to all you merchant account providers out there who adopt this practice - STOP IT!

My message to merchants - read your early termination penalties VERY CAREFULLY before signing. If you do get into a situation where your provider is trying to hit you with extreme and unreasonable penalties, those contracts are unenforcable in court. You can fight it, and you'll win.


Dave said…
Thanks for the important post. My experience in the field of merchant account and credit card processing taught me that there is a tradeoff between the terms of merchant accounts offered by different providers. Some are asking for termination fees, others are waiving, but usually with a certain price (pips on the discount rate?!). A merchant needs to compare and make sure the offered merchant account indeed suits his needs and his business forecasts. Comparing is made easier using directories such as In any case, an advice for life (and especially for credit card processing) is – Read The Fine Print!!!!
Dave - Thanks for your comments! I couldn't agree more.

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