CONTRACTS
Not To Be Ignored
This, to put it bluntly, is a very important chapter. About half of you who read this chapter and own a business do not even know that you have a contract. Commonly the representative who originally set you up for your processing services probably didn’t go over the agreement and what it involves as to the obligations by you as to how long you must receive the services of the provider and what will happen if you cancel prior to the term of the agreement. So, importantly, let’s cover this.
About six years ago many processors determined that they were losing much of their business because competitors were coming in to the merchant and gave a better rate than what the merchant was paying with their present processor. The competitor determined what the volume the business was doing and showed the owner how much he would save. The excited owner then said where do I sign? Thus the owner would change processors and enjoyed the savings. Or did he?
Low and behold after about three or four months pass by, the owner starts seeing on his merchant statement, fees that he did not see before. Rates or transaction fees were not what was agreed upon and have increased six, eight or ten points. Many enhanced charges on his last page were not understood. The owner wanted answers. He would call the sales representative who signed him up with no return calls to his messages. He would call their client services who tell him that the increase was announced on his previous merchant statement that abided by the thirty day notice in the agreement. When he asked of why the increase he would just get the run around. Now being upset that now the owner is paying as much or more from the previous processor that he left, he contacts the previous processor and says to sign him back up and that he made a mistake. Now that the owner is back with the processor that, possibly he should have stayed with, and the original processor got back their merchant that almost left them. Now, all is well. Well, not really!
You see, in this industry of credit card processing, the profits of a reputable provider is very low while the profits with those who take advantage of business owners by not presenting a complete merchant program is very high. With the expenses of setting up a merchant into a providers system, it has been determined with many providers that to set up a merchant on a processing program would cost the provider from $500 to $800. These expenses may include programming the merchant into the system, sales representation, internal investigations, association compliance, merchant training and initial welcome kit with supplies. With these expenses and the low profit margin of an honest provider, it may possibly be six months in which the provider can start making a profit!
Now with the above example of a merchant leaving the provider and then coming back after a few months, the provider can have the expenses of setting up the merchant twice on the system and spending $1,000 to do this. To help resolve this problem, providers had to add into their merchant contract two items. The first item is the term of the contract which is usually between three to five years with automatic renewals for successive one year terms. The second item was an early termination fee. With this fee, if the merchant decides to terminate the agreement prior to the term of the agreement, the merchant would be obligated to pay the provider an amount that is stated in the agreement.
Now this is where it gets a little sticky as to what amount the provider is charging. I fully agree that there should be a term. Whether it is one year, three years or five years it really does not matter. What matters is; what is a fair amount that should be charged if the merchant wants to cancel early? With this writer, I believe that the amount should be the basic coverage of the expense originally to set up the merchant which is what I discussed earlier of $500 to $800. This is fair to the provider and understanding to the business owner. What is sad, and is happening now, is that some providers out there want to make additional profits on the early cancellation fee. I have seen figures of early termination fees of $1,500 to $3,000 to the astonishment of the business owner. Not only is the fee excessively high, but to the surprise of the owner, it was never discussed that there was any term contract or early termination fee at the time when the dotted line was signed!
With the above, I have talked about the protection of the processing provider in case of early termination and why it should be done. I talked about the fees involved and what is a fair amount to be charged. Now what about you, the merchant? Why would it be advantageous for you to sign a contract to a long term obligation? Sure you may be signing this agreement because the provider is saving you money in processing fees but how long will that last? Will they raise their fees in a few months just like the above example? Does the contract protect you from raising the processing fees? After all, it’s a contract.
The dictionary says that a contract is a binding agreement. This means that it is a mutual obligation and understanding or arrangement. In your contract, do you have a binding agreement that says, OK, since I will sign this agreement for so many years and if I cancel early I will pay a cancellation fee but, since you would like to have this arrangement, I do not want my processing fees raised whenever you fill like it. Sounds good to me, how about you? The processor gets what he wants which is a term and a cancellation fee so why not the rate being not increased that is quoted in the agreement? After all, this is an agreement starting on this date and ending on that date. Did you discuss your agreement? Did the representative completely cover these important items or did he bypass them? Did you think that you were just signing an application to get approved with not knowing these items in small print?
I fully agree that a provider should have a term in an agreement and an early cancellation fee, while, with the merchant, I do agree that you should be protected with unexplained increases in your fee program but with one exception. As I have discussed earlier, in our industry we have a cost which is called a buy-rate. These costs from our Association sometimes have small increases being announced. Commonly this happens about every two or three years. Since the profit margin in our industry is traditionally small, these increases can greatly affect our bottom line and must be extended on to the merchant.
With an Association increase, I fully agree that within an agreement, this increase should be extended on to the merchant at cost of whatever the increase is. I am sure that all business owners would agree to this small increase while at the same time will protect them from providers wanting to make additional profits within the agreement time period. If you had this amendment, I am sure you would sign up for twenty years.
Now really, does it make much sense to sign an agreement that states that you must be with this company for so many years and if you leave early you must pay a fee and, by the way, those fees that we put on the agreement may be temporary and we do not have to give you a reason to raise them when we fill like it? No, no sense whatsoever!
I highly recommend going back to your agreement and understand all of its meaning. Completely understand how long is the term and how much is the cancellation fee. See if there is a clause in there that says that processing fees can be raised for any reason whatsoever. In this writer’s opinion, I would very much want to question this wording and have it changed. If the processor wants to raise the fees with having no cost increase with the Association, the agreement should be terminated and the processor should make a new agreement with the higher fees quoted and then ask you to sign on the dotted line. Would you sign?
As I have stated in this book, I am a consultant for this industry. Whenever I analyze any business whether it be large or small, I make sure that I let the merchant know that they will receive a guarantee that the quoted discount rates that I am going to give them will not be raised unless the Association raises their rates. Then and only then the increase will pass to the merchant at the increase cost. This is right and it’s fair. To establish an honest, respectful, long term business relationship, rates should be quoted for the long term. Not for just a few months which the processor is allowed to raise his processing fees while locking the merchant in for a long term obligation.
