An early termination fee is assessed when the holder of a merchant account decides to end the contract signed with their bank before the actual specified contract expiry date. In today’s competitive environment, you should probably be able to avoid signing a contract with a bank that requires a fixed term and an associated early termination fee. However some banks do insist that a fixed contract period with an early termination fee is there to protect them.
There are a couple of reasons for this. The bank that hosts your merchant account takes essentially all the responsibility for refunding any money that is claimed back from your credit card transactions. So called chargebacks that are requested by a cardholder are automatically executed, unless the merchant can provider definitive proof that the cardholder actually placed the order and received the goods or services. Banks believe that by charging an early termination fee running into thousands would force you to keep an account with them, and hence make it easier for them to claim back any funds they need to refund.
Perhaps the most sensible reason for an early termination fee is the cost of investment a bank makes by setting up a merchant account for you. You may be surprised at how involved setting up a merchant account can be. The person you are talking to on the phone is backed up by an arsenal of staff that does everything from background and credit checks, to configuring the computer systems that your Credit Card Processing system will connect to. By fixing the contract and charging an early termination fee the bank locks you in long enough to recover their investment.
Insisting on an early termination fee is probably not the wisest way of retaining customers, but it could potentially work to a bank’s advantage. Quite obviously you will stay with your current merchant account provider as long as you are locked in to the contract you signed, even if you are extremely unhappy about the quality of service you receive from your bank or if you are unhappy about how much fees and charges you pay.
Even though it may seem as if a bank that charges an early termination fee is conducting business in an unreasonable fashion, it does not necessarily mean that the bank is a poor service provider. It does mean though that there may be better deals, however you should be careful not to fall for deals that seem too good to be true.
Unscrupulous providers could very well be quite happy to skip on a fixed term contract because they realize that there are other factors that effectively lock you in. For example, once you have set up a merchant account and completed the activation of your Credit Card Processing system, you are quite likely to be reluctant to change providers due to the pure hassle of it. So it is important that you research the bank you are considering for your merchant account application, and find out whether it has a good reputation or not.