The True Cost of Canceling Your Payment Processing Contract: Understanding Termination Fees

Have you ever tried to switch payment processors only to be hit with a surprise termination fee? You're not alone. According to Clearly Payments, the average churn for the payment processing industry is over 20%.

Termination fees, also known as early cancellation or deconversion fees, can add up to hundreds or even thousands of dollars. But here's the good news: by understanding how termination fees work and what to look for in your contract, you can avoid costly surprises and make more informed decisions about your payment processing.

In this article, we'll break down everything you need to know about termination fees, including:

• The different types of fees and how they're calculated
• Real-world examples of how much businesses have paid to cancel their contracts
• Strategies for minimizing or avoiding termination fees altogether
• What to consider before signing a new payment processing agreement

Whether you're currently locked into a contract or shopping for a new processor, this guide will give you the knowledge you need to protect your business from unnecessary fees and make the best choices for your bottom line.

Understanding the Different Types of Termination Fees

When it comes to termination fees, not all charges are created equal. Payment processors use a variety of fee structures, each with its own calculation method and potential cost implications for business owners. Here are the three most common types of termination fees you may encounter:

Flat Rate Fees

Flat rate termination fees are fixed amounts that do not change based on the length of time remaining on your contract or your processing volume. These fees are predetermined and clearly stated in your merchant agreement. Typical flat rate fees range from $200 to $600 per location,

Prorated Fees

Prorated cancellation fees are calculated based on the amount of time remaining on your contract. The fee starts at a set amount and decreases incrementally over the life of the agreement. Prorated fees can be more cost-effective than flat rate fees if you cancel later in your contract term, but can still be substantial if you terminate early on

Liquidated Damages

Liquidated damages are the most expensive type of termination fee. These fees are calculated based on the processor's estimated lost profits over the remaining term of your contract.

• For example, if you process $50,000 per month with an average markup of 0.5%, and you have 2 years left on your contract, your liquidated damages could be:
  • $50,000 x 0.5% x 24 months = $6,000
• Some contracts include both a flat rate termination fee and liquidated damages

When evaluating a payment processing contract, carefully consider the potential financial impact of early cancellation under each scenario.

Factors That Can Affect Your Termination Fee Amount

While the type of termination clause in your merchant processing contract is a significant determinant of the potential cost of cancellation, several other factors can influence the amount you may owe.

Contract Length

In general, long-term contracts tend to have higher termination fees, as processors view the extended commitment as a way to recoup their costs and ensure a steady stream of revenue. For example, a 5-year contract may have a higher flat rate termination penalty compared to a 3-year contract.

Processing Volume

If your merchant agreement includes a liquidated damages clause, monthly processing volume may play a role in determining your termination fee. Processors often calculate liquidated damages based on your average monthly volume and their expected profit margin over the remaining term of the contract.

High-volume merchants should be especially cautious when agreeing to contracts with liquidated damages clauses, as the potential termination fees can be substantial

Other Factors

In addition to the variables mentioned above, other merchant agreement-specific factors can influence the calculation of termination fees, such as:

• Terms negotiated at the beginning of the contract
• The type of business and its perceived risk level
• The length of time the merchant has been with the processor
• The reason for termination (e.g., breach of contract, change in business needs)
• Any special promotions or incentives offered at the time of signing

While these factors may not apply in every case, they demonstrate the importance of thoroughly reviewing and understanding your unique merchant services contract terms before signing or deciding to terminate.

Strategies for Avoiding or Minimizing Termination Fees

While termination fees can be a significant cost for merchants looking to switch payment processors, there are several strategies you can employ to avoid or minimize these charges. By proactively managing your contract and understanding your options, you can make more informed decisions and potentially save your business thousands of dollars in termination fees.

Carefully Review and Understand Your Contract

Thoroughly review and understand your payment processing contract clauses before signing. If you're unsure about any terms or conditions, don't hesitate to ask for clarification from the processor or seek legal advice from a professional

Negotiate Fees and Terms Upfront

When entering into a new payment processing agreement, negotiate the terms and fees upfront. Many merchants mistakenly believe that termination fees and other contract provisions are non-negotiable, but processors may be willing to make concessions to win your business.

Some key points to negotiate:

1. Request a waiver or reduction of termination fees
2. Ask for a shorter initial contract term or a month-to-month agreement
3. Seek a cap on liquidated damages or opt for a flat rate termination fee instead
4. Ensure that any verbal promises or personal guarantees made by sales representatives are documented in writing

Monitor for Agreement Changes

Regularly review your statements and any notices from your processor throughout the life of your contract. Keep an eye out for any changes to your agreement that could impact your termination fees or other obligations. In some cases, significant changes to your agreement may give you the right to terminate without incurring fees, so it's essential to stay vigilant

Provide Proper Notice

When you decide to terminate your payment processing contract, it's crucial to follow the proper procedures for notification. Most agreements require written notice to be sent via certified mail or another traceable method.

• Review your contract to determine the required notice period (usually 30-90 days) and any specific instructions for termination
• Be sure to send your notice to the correct address and keep a record of the mailing date and receipt
• Follow up with your processor to confirm they have received your termination request and to discuss any outstanding obligations or fees

Consider Alternatives to Termination

If you're unhappy with your current payment processor but want to avoid paying extra charges, it's worth exploring alternatives to cancelling your contract outright. In some cases, you may be able to negotiate better rates or terms with your existing provider, saving you the hassle and expense of switching.

• Schedule a call with your account representative or a member of the processor's retention team to discuss your concerns and explore potential solutions
• Come prepared with specific examples of how your current contract terms or fees are impacting your business, and be open to finding a mutually beneficial compromise
• If your processor is unwilling to make concessions, consider the long-term costs and benefits of staying versus terminating and paying the associated fees

Real-World Examples and Case Studies

To better illustrate the potential impact of termination fees and showcase best practices for managing these costs, let's take a look at some real-world examples and case studies.

Example 1: Flat Rate Termination Fee

A small retail business signed a 3-year payment processing contract with a $500 flat termination fee. After two years, the owner sold the business, and the new owner wanted to switch processors. Despite completing two-thirds of the contract, the business had to pay the full termination fee. The new owner reluctantly paid and switched to a new processor.

Lessons learned:

• Always review and understand termination fee clauses before signing a contract, even if you don't anticipate needing to cancel early
• Consider the potential impact of termination fees on the sale or transfer of your business
• When possible, negotiate for a waiver or reduction of termination fees upfront

Example 2: Prorated Termination Fee

An e-commerce merchant signed a 5-year contract with a prorated termination fee starting at $1,000, decreasing by $200 yearly. After three years, they found a better processing rate and calculated that the savings outweighed the $400 termination charges. They gave notice, switched providers, and saved money in the long run.

Lessons learned:

• Regularly assess your payment processing needs and costs as your business grows and evolves
• Compare the potential savings from switching providers against any termination fees you may incur
• Follow proper termination procedures and provide adequate notice to minimize the risk of additional fees or penalties

Case Study: Liquidated Damages

A mid-sized restaurant chain signed a 5-year payment processing contract with a liquidated damages clause. After two years, a competitor processor offered significantly lower rates and more advanced reporting tools. The restaurant chain calculated that they would owe approximately $12,000 in liquidated damages based on their agreement.

Before switching, the chain negotiated with its current processor, presenting the competing offer and emphasizing its desire to remain loyal customers if the processor could match or beat the new rates.

The processor, valuing their long-term relationship, agreed to waive the liquidated damages fee and lower their rates to match the competing offer. The chain ultimately decided to stay with its original processor, avoiding the fee and securing better rates in the process.

Lessons learned:

• Don't assume that fees are set in stone; there may be room for negotiation, especially if you're a valued customer
• Approach your current processor with competing offers and see if they're willing to match or beat them to keep your business

Switch to Zen Payments for Your High-Risk Payment Processing Needs

Navigating the complex world of payment processing contracts and termination fees can be a daunting task for any merchant. However, by understanding the different types of fees, the factors that influence them, and strategies for minimizing them, you can make more informed decisions and protect your business from unnecessary costs.

For high-risk businesses, finding the right processor can be tricky. At Zen Payments, we have years of experience working with businesses in high-risk industries and can support you through your business's unique ups and downs. Contact us today to get started.