Why Do Credit Card Processing Companies Charge Early Termination Fees (ETF)?

There are a number of reasons given as to why credit card processing companies assess a fee if you choose to terminate your contract before it expires. This fee is referred to as an Early Termination Fee (ETF) and may be used:

1. 1. To recover some costs from the up-front fees to set up your merchant account.
2. 2. To recover some costs from the fees involved in maintaining your merchant account.
3. 3. To cover the projected cost of lost revenue on a terminated contract.

There are still a few processing companies that don’t have an early termination fee (ETF). But the majority of processors require some remuneration, even if it’s only $50, if you choose to cancel your credit card processing contract early. This fee is normally deducted from your bank account on file with the credit card processing company.

However, there’s another underlying reason why credit card processing companies have an early termination fee: If it will cost you to get out of your contract, you may think twice about canceling. There’s nothing sneaky or underhanded about this. In fact, it makes good business sense for the credit card processing companies. They want to keep your business, and when other processors come along with claims they can save you money and you’re tempted to switch, the ETF does act as a deterrent. But what your present processor really hopes to achieve with a termination fee is to get you to call them before you cancel your contract so they can try to match or beat the competition.

Charging an early termination fee is not illegal, but it is bad business when the credit card processing company does not clearly state the terms of their ETF at the time you sign your contract. So rather than ask: Why do credit card processing companies charge an early termination fee, perhaps the better question to ask is:

What Do I Need To Know About Early Termination Fees?

There are three basic types of early termination fees:

1. 1. Flat Rate ETF
   A set amount that is charged no matter when or why your cancel your credit card procession contract.
2. 2. Prorated ETF
   Some ETF’s are based on the length of the time your contract has been in effect. For example, the highest rate applies should you choose to cancel your contract within the first year of its term. However, if you terminate during the second year of your contract, it will cost less, and some companies have an even lower scheduled rate if you terminate during the third year of the contract.
3. 3. ETF Based on Lost Profit
   This option can be very costly for the merchant. Here’s why: If the credit card processor is making $100 per month from processing your credit card transactions and you choose to cancel with 18 months left on your three-year contract, your ETF would be $1,800. Considering the average fixed early termination fee is usually somewhere between $300 and $500, an ETF based on lost profits for the processor can be a substantial loss for you.

Now that you understand the different types of ETF’s, here is how you can protect yourself from paying any unwarranted or unreasonable termination fees.

1. 1. Read your contract carefully before signing it.
   Be sure you know the term of your contract and what conditions must be met should you choose to terminate early. Most credit card processing contracts run three years. Often, the merchant is only interested in reviewing the fees. But the terms and conditions of your processing contract are just as important. Ask your representative to explain all the fine print before you make any commitments.
2. 2. Most providers require written notification to cancel your processing contract. Make sure you follow the terms of your agreement to the letter. If you do, you have a better chance to negotiate the cost of early termination or get it waived altogether.
3. 3. Check your statements to see if any of your fees have been raised within the last three month. Some states have a law that says if your fees have been raised at any time during your contract, you can cancel within a certain period after the increase with no ETF.
4. 4. Some contracts waive ETF’s if you close your business before your contract expires. If this is not stipulated in your contract, make sure your credit card processing company knows the circumstances surrounding your business closing, and ask to be released from your ETF.