Merchant Contract Terms and Hidden Fees: What to Check

Key takeaways

Contract cost formulas

Add processing fees (rate × volume) on top to compare total cost of ownership. Some termination fees are flat; others are calculated as estimated lost revenue for the remaining term. Read the exact clause.

Worked example (illustrative numbers)

A café reviews a 36-month processing agreement with a leased terminal. All numbers are illustrative only, not quoted fees.

• Monthly fees: statement $15 + PCI $20 + gateway $25 + average minimum shortfall $10 = $70
• Monthly fees over contract = $70 × 36 = $2,520
• Early termination fee: $495
• Equipment lease: $79 a month for 48 months = $3,792
• Cost over contract = $2,520 + $495 + $3,792 = $6,807 (before processing rates)
• Leaving after 12 months: fees paid $70 × 12 = $840, plus the $495 termination fee, plus $79 × 36 = $2,844 in remaining lease payments
• Cost to exit at month 12 = $495 + $2,844 = $3,339 on top of the $840 already paid

Illustrative numbers only. Your costs depend on your provider, card mix and how you accept payments.

Early termination fees

An early termination fee (ETF) is what you owe if you close the account before the contract ends. Some are a flat amount; others are a formula, such as estimated monthly fees for every remaining month, sometimes called liquidated damages. The second kind can be far larger than a flat fee.

Ask whether the fee applies if the provider changes your pricing, if you sell the business or if you close it. Ask whether it can be waived or reduced, and get any waiver in writing.

Automatic renewals

Many merchant agreements renew automatically for another term unless you send notice within a specific window, often by a specific method. Missing the window can lock you into another year or more and reset the termination fee. Put the cancellation window in your calendar on the day you sign and keep proof of any notice you send.

Equipment leases

Terminal and POS leases are often written by a separate leasing company and may be non-cancelable. That means closing the processing account may not end the lease, and the total of lease payments can be several times what the equipment would cost to buy. Compare the lease total with the purchase price, ask whether the equipment works with other providers, and ask who owns it at the end of the lease.

Monthly minimums, PCI and statement fees

These fixed fees are easy to miss because each one is small. Look for them in the fee schedule and on every statement:

• Monthly minimum: if your processing markup falls below a set amount, you pay the difference
• Statement or account fee: a flat monthly charge for the account
• PCI program and non-compliance fees: annual or monthly charges tied to security compliance (see our PCI compliance guide)
• Gateway, batch, online reporting or chargeback fees
• Annual or regulatory fees billed once or twice a year, which can be easy to miss on a monthly review

What to ask before signing

• What is the contract term, and how and when can I cancel without a fee?
• Does the agreement auto-renew? What is the notice window and method?
• How is the early termination fee calculated, in dollars, at months 6, 12 and 24?
• Is equipment leased? Who is the lessor, and can the lease be cancelled if I close the account?
• List every fixed monthly, annual and per-event fee in dollars
• Can pricing change during the term, and how much notice will I get?
• Do you hold reserves, and under what conditions?
• Can I see the full agreement, including the terms and conditions document, before signing?

Legal and tax points stay with your advisors

Merchant agreements are business contracts, and many consumer protection rules may not apply to them. Have your attorney review termination, renewal, personal guarantee and lease clauses before you sign. Processing fees and lease payments may be deductible business expenses, but treatment depends on your situation, so talk to your CPA.

Source: FTC: Business guidance

Common mistakes

• Comparing offers by processing rate alone
• Signing a non-cancelable equipment lease without comparing it to buying
• Missing the auto-renewal window
• Not reading the separate terms and conditions document referenced by the application
• Ignoring annual fees that appear only once or twice a year
• Assuming a sales promise is in the contract when it isn't in writing

Official sources to check

Rules change. Check current rules at the source and talk to your advisor before you act.

• Visa: Regulations and fees for small businesses
• Mastercard: Rules and standards
• FTC: Business guidance
• Consumer Financial Protection Bureau (CFPB)

Common questions