Early Termination Fees in Payment Processing Explained

If you try to close a merchant account, you might be surprised to learn that you owe an early termination fee. This is a common cancellation fee in merchant agreement contracts, yet so many business owners overlook it when applying for a merchant account. 

This in-depth guide explains everything you need to know about early termination fees and how they work for credit card processing.

Whether you’ve just discovered that your existing merchant agreement has an early termination fee or you’re trying to avoid cancellation fees before signing a new contract, we’ll cover all the bases to ensure you’re equipped with the right information to make an informed decision. 

For those of you thinking of canceling your agreement because your processing fees are too high, it might actually be cheaper to stay with your current processor. This guide will also teach you how to get reduced processing rates in that scenario.

What Are Early Termination Fees?

An early termination fee, also known as a cancellation fee, is a contract clause that requires businesses to pay a penalty for canceling a merchant agreement before the term expires. 

Early termination fees are designed to prevent merchants from switching processors. Payment processors don’t want to lose clients, so they add this clause to contracts to discourage merchants from leaving. These fees also provide extra revenue for the processor if a merchant decides to cancel early.

Unfortunately, payment processors aren’t known for their transparency—and many merchants are surprised to learn of the early termination clause when they try to cancel a contract. 

Types of Early Termination Fees in Payment Processing Contracts

There are three main types of early termination fees that you’ll find in your merchant agreement—flat-fee cancellations, liquidated damages, and prorated termination fees. 

Flat Fees

Flat-rate termination fees are exactly what they sound like. Merchants are charged a fixed fee to cancel the contract early. This amount is pre-determined and stated in a merchant agreement, and it has nothing to do with your processing volume. 

For example, if you have a $500 early termination clause, you’ll pay $500 for canceling your contract earlier than the expiration date. It doesn’t matter if you cancel after one month or 24 months; the fee is always the same. 

If you’re going to have to pay an early termination fee at all, a flat fee is the most ideal—assuming it’s a reasonable figure. 

Liquidated Damages

A liquidated damages fee is based on how much the processor estimates they’ll lose by the contract getting terminated early. It’s typically calculated by taking the average monthly processing fees from the contract start date to the termination date and then multiplying that number by the remaining months on the agreement.

Liquidated damages are the worst type of early termination fees and by far the most expensive. 

For example, let’s say you have a 36-month contract, and you want to cancel after 16 months. If you paid an average of $3,500 monthly in processing fees, your processor would multiply it by the remaining 20 months on your contract for a total of $70,000 in liquidated damages. 

Prorated Termination Fee

Prorated termination fees are divided over the lifetime of an agreement, and the total sum decreases the closer you get to the end of your agreement. 

For example, let’s say you have a $5,000 prorated termination clause in your 36-month merchant agreement. This works itself out to about $139 per month over 36 months. So if you want to cancel with six months remaining on the agreement, you’d pay an early termination fee of about $835.

Prorated termination fees are much more expensive if you cancel early on in a contract. 

How Much Do Early Termination Fees Cost?

The average flat-rate early termination fee is about $300 to $800. But the actual cost of terminating your contract early can cost tens of thousands of dollars, and the exact rate varies based on the terms of your agreement. 

Some merchant agreements have language that includes a flat fee plus liquidated damages. For example, you might have an early termination clause that reads something like:

If you terminate this agreement before the end of the term, you agree to pay an early termination fee of $500 per location or liquidated damages, whichever is greater.”

At first glance, this sounds like it would only cost $500 for each location. It’s not ideal, but it won’t put you out of business. However, the liquidated damages clause can cost thousands. If you have a liquidated damages clause in your agreement, an early termination fee could cost upwards of $50,000 to $100,000 or more. 

These are the types of scenarios where merchants feel like they’re being held hostage by their processors. 

How to Avoid Cancellation Fees in Merchant Processing Agreement

As a merchant, you need to be extremely diligent when you’re signing agreements with your processor. All of the tips below will help you avoid paying early termination fees. Whether you’re thinking about switching or you’re reviewing the clause in a potential agreement, the tips below will help protect you and your business from paying unnecessary fees. 

Don’t Switch Processors

This might sound obvious, but the easiest way to avoid paying an early termination fee is by staying with your current processor. Most merchants try to cancel an agreement because they feel like they’re overpaying and think they can get cheaper rates elsewhere, but that’s rarely the case. 

Nearly every payment processor on the market will quote you at a lower rate than your current processor if you tell them you’re thinking of switching. But those lower rates rarely last and can quickly increase to more than you’re paying now. Switching your hardware, software, and processing is a headache, and another added expense in itself. 

95% of the time, it’s better to stick with your current processor and negotiate lower rates directly with them. 

We worked with a client that was locked into a five-year contract with their processor, and had an $85,000 liquidated damages clause in their contract. Rather than switching processors or paying an early termination fee, we helped negotiate their rates, saving them $91,000 in the first four months and $275,000 in the first year. Read the full case study here. 

Get Everything in Writing During Negotiations

Unfortunately, this is something that we see all the time in this industry. A merchant claims that they were told by a sales rep that they’d never have to pay a fee for canceling early. But then they’re threatened with an early termination clause when they try to cancel. 

Never take the world of a sales rep when you’re negotiating a merchant agreement. If it’s not written down in the signed contract, then you’re going to be out of luck.

Theoretically, verbal agreements can hold up in court. But it can be tough to prove, and the legal fees and other costs associated with suing your processor probably won’t be worth it. 

Read the Fine Print Before You Sign Any Contracts

Always read the fine print of your merchant agreement. As previously mentioned, payment processors can be intentionally misleading and deceptive. 

You might see something about an early termination clause for $500 and just skim the rest, thinning $500 is a small price to pay if you want another option down the road. But if the fine print includes anything about liquidated damages, you could be on the hook for a lot more than that. 

Make sure you also have an attorney read your merchant agreement before you sign it. The legal fees will likely be much cheaper than the potential early termination fees. 

Monitor Changes to Your Statements

Early termination clauses might be voided if your processor changes the initial terms of the agreement at any point. The most common change would be an increase in fees. 

For example, let’s say you’re on an interchange-plus pricing plan, and your processor’s markup is 0.35% + $0.10 per transaction. After six months, they attach a notice to your statement saying that the new markup rate is 0.40% + $0.15 per transaction. 

Depending on the language of your merchant agreement, this change could allow you to cancel without paying an early termination fee. 

Provide a Formal Notice in Advance

Sending written notice to your processor in advance of cancellation can help you avoid early termination fees. Many contracts have a clause that waives certain fees if notice is received within 30 or 60 days of renewal. 

You can always request something like this to be included in your contract before you sign. 

Avoid a Personal Guarantee

As the name implies, a personal guarantee legally holds the business owner liable for damages when terminating a merchant agreement. Even if you have an LLC, the personal guarantee still gives the processor a right to come after you and your personal assets for breaking the contract. 

Almost every merchant agreement has provisions that survive the termination date. This helps protect the processor from chargebacks, fraud, and other fees that could occur after your relationship ends—and it’s common for these provisions to be covered by a personal guarantee. 

If your agreement has “individual guarantee” or “individual guarantor(s),” then your processor is likely trying to get you to personally guarantee the contract. It’s common for these sections to be followed by an “authorized representative” signature. In this instance, the authorized representative is signing for themself, as opposed to just a company representative. 

Final Thoughts on Early Termination Fees

Early termination fees are just another way for processors to take advantage of merchants. While the concept makes sense, some of the language in these contracts is designed to hold merchants hostage without letting them leave. 

Fortunately, you don’t need to switch payment processors and there are other ways to avoid early termination fees. 

Here at Merchant Cost Consulting, we can negotiate your rates with your processor and save you tens of thousands of dollars. Not only will this help you avoid cancellation fees, but it will help you save money moving forward. We’ll also provide ongoing monitoring services to ensure your processor isn’t increasing your rates or trying to sneak in other hidden fees. 

Get a free consultation to find out how much you can save without switching, or simply follow the best practices in this guide to avoid cancellation fees.