4 Terms in Credit Card Processing Contracts You Should Never Agree To

By Rich McIver

Obtaining merchant account services for your small business is a necessity in today’s plastic economy. In fact, 77 percent of all U.S. and Canadian transactions involve either credit, debit, or gift cards.

But, much like when you sign up for a cell phone contract, you’ll be presented with a contract that is five to ten pages of fine print. Unlike a cell phone contract, however, you have the power to effectively negotiate that contract. With that in mind, here are four contract terms in credit card processing agreements that you should get removed before you sign:

1. Setup Fee

Simply put, this is a straight commission to the salesperson. Most companies don’t charge them, and those that do pay almost all of it as a commission to the salesperson. Why? Because there isn’t much setup to actually do for a typical small business, and what there is, doesn’t cost the processor much more than the labor cost of a 15 minute phone call with you, their client.

Consequently, you can always get this fee removed from any contract. The salesperson may not love doing it, particularly because you just cut their commission, but they always will.

The only exception to this is if you’re having your processor install a multi-station POS system. These actually do require significant setup, so you’ll probably get charged something for it. Feel free to negotiate it down, though.

2. Cancellation Fee/Liquidated Damages

A cancellation fee is designed as leverage for the processor to keep you in a deal that you don’t want to be in. We’ve all had the experience of knowing that you’re paying too much for a service, but the $100 plus cancellation charge is so hard to swallow that we let it continue.

Thankfully, you can almost always negotiate the cancellation fee (also called a liquidated damages fee in some contracts) out of existence. You’ll typically get less pushback from the salesperson on this fee when asking to have it removed since it typically goes to the credit card processor instead of the salesperson.

The only exception to this is if you receive free equipment from the processor. If you receive a free terminal with a value of, say, $300, it’s reasonable that a processor wants to make back at least their $300 on you before you cancel the contract. That said, you can negotiate that the cancellation fee steps down each six month period, so that it is completely gone by year three.

3. Equipment Leases

Most merchant services companies offer you the option of purchasing your equipment outright, or leasing it from them for a monthly fee. But sometimes they’ll try to sneak a lease in your contract and disguise it as free equipment.

Leasing your credit card processing equipment is almost always a bad idea. You’ll usually end up paying two to three times the cost of the equipment if you were to buy it yourself instead. Also, if you lease your equipment you won’t be able to take it with you if you decide to switch providers, giving even more leverage to the credit card processing company to lock you in to a bad deal you want out of.

4. ERR Pricing

There are five major ways that credit card processing is priced: Tiered, Interchange Plus, Flat Rate, Monthly Membership, and ERR. While on an individual deal each can be priced very cheaply or expensively, in general, ERR is misleading and thus the source of a lot of “gotcha” pricing.

Without going into too many boring details, the benefits of ERR pricing models are all from the salesperson’s side. It allows the salesperson to show you a very low sounding rate, with a reasonable sounding surcharge. But through a lot of tricky definitions, the amount you end up paying is significantly higher than what you usually thought you agreed to.

You don’t have to understand everything about ERR pricing to know to look out for it on your contract. If you see the acronym ERR or “Enhanced Recover Reduced” on your contract, ask your salesperson to pull it out and instead price your deal in a tiered or interchange plus format.

Credit card processing is a confusing industry for small business owners to navigate. It is laden with fine print contract terms that can end up costing a business hundreds, if not thousands of dollars, in extra fees per month. Thankfully, as a business owner you have some leverage to negotiate those contracts to your advantage, if you know the right things to ask for. So, don't be bashful and push for better contract terms in your credit card processing agreement.