Are You Being Held Captive By Your Merchant Services Provider?

In Business Tips, Business Transactions, Contracts by Kristy DonahueLeave a Comment

It is astonishing how many businesses continually set themselves up to pay outrageous fees and penalties.

As business attorneys, we are skilled at reading contracts for our clients and pointing out any unfair or questionable content. However, most business owners enter into contracts everyday without consulting a business attorney. Naturally, if everything goes well, there are generally no issues. However, should a business owner want to terminate a contract early, things can get down right ugly-fast. Absent an attorney eye-balling the agreement ahead of time, the next best alternative would be for business owners to arm themselves with basic knowledge.

Today we are taking a look at merchant services contracts. Often riddled with “landmines” buried within their lengthy paragraphs, its important to know what to look for and what to avoid before you commit your business to what could be multiple years of a potentially painful and costly obligation.

“Termination” and “liquidated damage” fees are popular terms in merchant services contracts. Shockingly, over 90% of small business owners who find themselves subject to these fees were not even aware they consented to them when they signed up for service with their provider. Even more frustrating to business owners trying to get out of a merchant services contract is that in most instances, these fees are automatically charged once the contract has been terminated, regardless of the business owner’s reasons for the termination.

We spoke to Ginger Hollowell, owner of the Electric Money Company, which provides merchant services to businesses in New Mexico. We wanted to learn the thought process behind these fees from a merchant services prospective.

BLSW: Ginger, what exactly is a termination fee on a merchant service contract?

GH: The standard among merchant services providers is a 3 year contract.  Since providers incur expenses setting up a merchant account, a termination fee is a way to ensure they are made whole for these upfront expenses. So, clients sign a contract for a minimum of 3 years and if they try to end the agreement early, the business owner is hit with the “Early Termination Fee”.

BLSW: Probably the biggest complaint business owners share with us about termination fees is that they were not even aware of it. Why is that?

GH: Well, if the sales person did not point it out to the business owner at the time they were signing them up for service, it probably went undetected. Usually, fee descriptions are located in the body of paragraphs within the “Terms and Conditions” section of the contract. Since it is not unusual for the terms and conditions section to be multiple pages long, it is usually skipped over by most business owners.

BLSW: Meaning, the details about the fees are there, but business owners simply do not read them?

GH: That’s correct. Like I mentioned, the contracts can be long and since they are written by lawyers- it can be difficult, if not painfully boring for the average person to read through.

Obviously, a good rule of thumb is to simply ask your salesperson about any fees before you sign up and start processing. If the salesperson is honest, they will point the fees out and explain them to you.

Since the “early termination fee” can be hefty; usually $300 or $400, it is also important to evaluate if switching to a new processor is actually saving money once that termination fee is calculated into the proposed “savings”.

BLSW: Do all Merchant Service providers charge early termination fees?

GH: No, they do not.

BLSW: So, again, it pays to read the contract in its entirety- or have your attorney review it- before you sign.

GH: Exactly.

BLSW: In addition to the “Early Termination Fee”, some processors also have a “Liquidated Damages Fee”. Can you elaborate on it?

GH: Yes, that is definitely one to watch out for. That is because it means that if you terminate your contract early, you owe the merchant services provider an average of all the fees they would have collected from you until the end of the term, even though you are not processing with them anymore. Liquidated damages is a great way to deter a business owner from switching to an another merchant services provider because it creates a huge financial burden that virtually no one wants to incur. Often times, the best solution when liquidated damages are being threatened is to simply keep processing with the same provider; even if they have lousy service or high fees. This is because most businesses can’t afford to switch companies should a punishing contractual term like liquidated damages be enforced.

BLSW: How common is a liquidated damages fee in the merchant services world?

GH: Well, it is certainly not uncommon. That is why business owners need to be really careful.

BLSW: Is it safe to assume liquidated damages fees are generally not pointed out either to business owners when they sign up for service?

GH:  Again, all I can say is that it is really important to actually read the terms and conditions section in the contract before you sign up. Definitely be on the look out for fees; especially the two we have discussed today. Some of these tactics do sort of feel mafia-like. So, the last thing you want to do is willingly sign up for them.

As far as the quality and caliber of the sales people selling merchant services, there are all kinds. Some are very good and really diligent about explaining things thoroughly. Others just hope for clients that doesn’t ask a lot of questions and simply sign where they are told.

When it comes to merchant service companies, there are lots of quality companies out there to choose from. Certainly I feel like my company is one of them. We treat our customers well and provide excellent services. As a result, our customers are happy and tend to stay with us a long time. Therefore I do not find myself trying to recoup set up costs or fees by instituting stiff penalties.

We know there may be times that it may seem silly and overly expensive to have an attorney review every document that crosses a business owner’s desk. Some services like cell phone service, internet service or merchant services seem standard and these companies do not generally change their contracts to appease one client. However, it is important to remember that while one company may not be willing to change their terms for you, there are other companies out there to do business with. Therefore, it is worth the time and effort to shop around, ask questions and actually read the contracts put in front of you.

If you have concerns about elements of a contract, if the sales people or vendors involved are not adequately explaining the terms, you need to do one of two things. Walk away or consult with your attorney. Choosing to not read a contract in its entirety does not mean your are immune to its terms.

Are you party to an unfair contract? Are you being charged costly fees that you did not agree to? Do you need help understanding all the elements to a contract you are considering executing?  Contact us today 

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