Another nail in the coffin for termination or “early cancellation” fees!

Termination Fees:

One of the biggest threats looming on the horizon to the practice of paying for merchants is the laws limiting termination fees. In order to preserve the value of their investment, many ISOs charge hefty termination fees to merchants that want to terminate their merchant agreements and move their processing to a competitor. Most ISOs charge a termination fee of about $300.00 to a merchant that wants to move its processing to a competitor.
However, many other ISOs charge “lost profit” type of termination fees where the ISO takes the lost profits the ISO is missing out on because of the merchant terminating the merchant agreement before the initial term of the agreement is over as a termination fee. These lost profit type of termination fees can mean that a simple restaurant is charged as much as $10,000.00 or more to terminate its merchant account. Many ISOs don’t collect the termination fee but instead use it as a way to force the merchant to keeps its credit card processing with the ISO. Although it is a questionable business practice, these types of lost profit termination fees have been used effectively to keep merchants from switching their processing.
However, new laws limiting termination fees may make it much harder to keep merchants from moving their processing to a competitor. In the first law of its type, Arkansas just implemented a law limiting termination fees to $50.00. Also, upon termination there is a limitation that the merchant cannot continue to be charged any monthly minimum fee for more than 1 month after the agreement is terminated. These limitations should effectively make it impossible to charge more than a $50.00 termination fee. Arkansas’ law is far from an anomaly, as many other states are contemplating and are sure to be implementing such laws.
If these laws become standard throughout the country, it could make the practice of paying for merchants economically unsound. If merchants can leave pretty much whenever they want and move their processing at will, it will be much harder to justify paying an agent or the merchant $1,000.00 in order to move their processing to a particular company, if the company has no way of ensuring it gets a return on its investment. It may not be an intended consequence of these termination fee laws, but they could mean the end of paying for merchants.

The information contained herein is for informational purposes only and should not be relied upon in reaching a conclusion in a particular area. The legal principles discussed herein were accurate at the time this article was authored but are subject to change. Please consult an attorney before making a decision using only the information provided in this article.

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Bill Hoidas
District Sales Manager
Larger B2B/MOTO/Internet Accounts
Product Development Manager
Matrix Payment Systems
(847) 381-3482 office
(847) 381-4289 fax
http://paymentconsulting.net
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