It is not easy to negotiate a merchant service agreement, as there are often confidential charges hidden in the terms and conditions. To eliminate unnecessary expenses, you need to know the crucial terms and question the contractor adequately before signing. By being proactive, open, and knowledgeable, you can negotiate a reasonable agreement that suits your business without unpleasant surprises later on.
Common Types of Hidden Fees
With merchant service agreements, there are some hidden fees you may not expect. These are some of the most popular hidden fees you should lookout for:
1. Monthly Minimum Fees
Occasionally, even when your sales might be low, you’re still obligated to pay a minimum fee. If your transaction fees are less than a specified amount, your processor will deduct the difference. Therefore, if you don’t meet the minimum fee, you’ll be paying more even when you don’t have enough sales.
2. Early Termination Fees
If you want to change providers or shut down early, most merchant agreements include a penalty for terminating early. These charges are fairly significant, so be sure to read the cancellation clause before you sign.
3. PCI Compliance Fees
To safeguard customer information, companies need to abide by PCI compliance guidelines. Some processors will charge you a fee to pay for the monitoring of this compliance. If you mess up and are not in compliance with the standards, you will be hit with a non-compliance penalty.
4. Statement Fees
While you might expect your monthly billing statement to be free, some providers charge for sending you the statement—whether it’s digital or paper. It’s one of those small fees that can feel unnecessary, but it adds up over time.
5. Batch Fees
Each time you batch transactions (which is normally a daily thing), you may incur a little batch fee. Though it’s normally less than a dollar, the fee can add up fast if you are batching daily.
These fees can add up quickly, so make sure you read your merchant agreement closely to keep hidden charges from surprising you.
How to Calculate Effective Rate and Markup
To determine your effective rate, you’re determining what percentage of your sales are going towards fees each month. It’s easy: all the monthly charges you pay (statement charges, gateway charges, equipment leases, etc.), add them up and divide them by your total monthly sales.
Let’s say your total sales for the month are $10,000 and your total fees are $650. Here’s how you determine the effective markup:
Divide your markup charges by sales total:
$650 ÷ $10,000 = 0.065
Then multiply by 100 to get the percentage:
0.065 × 100 = 6.5%
This indicates that 6.5% of your sales are paying for fees.
This is ideal for interchange-plus or subscription-based processors. But for processors with tiered or pay-as-you-go models, the fees are blended with interchange rates, so the calculation is a bit different. But this simple formula provides you with a good starting point!
What Can Be Negotiated In a Merchant Agreement?
When you’re reading a merchant agreement, keep in mind that the vast majority of terms, such as card associations, essential services, and industry standards, can’t be negotiated. But roughly 10% of the agreement can be negotiated, and that’s where you can help your business.
One area to pay particular attention to is the contract length. Don’t let payment processors bind you to lengthy contracts. If a processor requires a long-term commitment, it may be a warning sign that they are attempting to prevent you from leaving. You don’t need to do this—seek out flexible agreements that don’t commit you to a set time period.
Early termination charges (ETFs) are another one to be aware of. These are meant to keep you with the provider when things aren’t going well. Don’t accept these fees because they’re mostly a means of keeping you from leaving the provider. If the contract is good, the processor won’t have to apply penalties for early termination.
Finally, be careful of auto-renewal terms. They are not necessary and can get you stuck in a new term without notice. If you do not require a long-term commitment, you should not be automatically bound to another term without your approval. Always negotiate these terms to give yourself greater control over your contract.
How to Spot and Avoid Hidden Fees in Merchant Agreements
To prevent surprise fees in your merchant contract, it’s important to read over the fine print carefully. While contracts are sometimes lengthy and complex, investing the time to read over the fee sections can prevent unwanted fees. If you don’t understand something, ask for an explanation.
It’s also smart to be proactive and inquire about other fees from the provider. For instance, ask about fees for transactions, minimum monthly charges, policy for cancellations, and charges for PCI compliance. The more questions you ask early on, the fewer surprises you’ll have later.
Also, if you shop around and compare offers from different providers, then you have negotiating power. Don’t accept the first offer that comes your way; compare a minimum of three providers to get the best fee structure. Also, note that the lowest rates may not necessarily be the best if there are some hidden charges involved.
When you are negotiating improved terms, be aware of your leverage, particularly when you have a high volume of sales or an established relationship with the provider. Providers tend to negotiate transaction fees, monthly fees, and even batch or statement charges. If you are being charged a monthly service fee, request a reduction if possible. Using these tactics, you can safeguard yourself against surprise fees and get better terms.
Things You Should Never Ignore When Signing a Merchant Service Agreement
When signing payments processing agreement for your company, there are a few things you should keep in mind to save money and avoid hassle in transactions:
1. Blended vs. Interchange Plus Pricing
Most payment service providers (PSPs) offer “simple” pricing, often using a blended model. This means a fixed fee plus a variable percentage, based on factors like card types and region. However, larger merchants may benefit from the “interchange plus” model, which breaks down the fees into more transparent components, such as the interchange fee, scheme fee, and acquirer mark-up fee. Over time, switching to this model could save money, especially as your business grows.
2. Transaction & Volume Tiers
PSPs usually charge according to the volume of transactions you handle. At the beginning, the fees can be okay, but when your business grows, getting fees reduced with higher volume becomes important. PSPs usually have tiers according to monthly transaction numbers, offering better rates to larger enterprises. Being aware of your sales volume and negotiating suitable fee arrangements can lead to substantial long-term savings.
3. Hidden Charges to Look Out For
Apart from the fundamental transaction charges, you also need to be aware of several other related charges, such as management fees, alternative payment method fees, refund fees, and chargeback fees. Refund and chargeback, especially, can be expensive, particularly in segments like fashion or electronics. Make sure that these charges are included in your negotiations because they can add up quickly.
4. Fraud Prevention
Chargebacks are not only inconvenient but carry penalty fees as well if they cross specified limits. Most PSPs have their own fraud prevention tools, but these are usually expensive per transaction. Be sure to shop around for third-party fraud prevention tools, as they can provide superior protection at less cost.
5. Settlement Frequency & Deposits
Cash flow is critical, particularly for rapidly growing e-commerce companies. The frequency of settlement, how frequently your payments are made and deposited to your account can be a significant factor. PSPs also might ask for an up-front deposit or reserve, particularly if your company is high-risk. Knowing the specifics regarding deposits and settlement schedules will better position you to budget financially.
6. Forex and Currency Fees
If you’re selling globally, forex fees can easily mount up. Most PSPs have multi-currency capabilities, but they’ll charge you an extra premium for currency conversion. These fees can eat away your profit margins, so it’s important to keep them under control, particularly if you’re serving a global market.
Operational Changes to Reduce Payment Processing Cost
If you want to reduce payment processing expenses, there are a number of operational changes you can implement that can make a big difference. First, by optimizing transaction types, some payment types are more expensive than others. For instance, swiped transactions are usually less expensive than keyed-in transactions, and debit cards tend to be lower in cost than credit cards.
Although you cannot always dictate how your customers pay, you can get them to pay less by putting up clear signage or a reminder. Also, having the correct hardware, such as an EMV reader, can assist you in saving money and fraud exposure, as EMV transactions are subject to lower interchange charges.
Another intelligent choice is to implement integrated payments. By linking your payment processor straight into your POS system, payment information flows easily, minimizing human mistakes and making the checkout process smoother. This also minimizes manual entry, saving you both time and money. For instance, having a combined system eliminates the need to work with various vendors or complicated procedures, making everything easy.
Finally, posting transactions as quickly as possible will reduce your credit card processing fees. Most companies wait until the end of the day or even the following day to post, but posting within 24 hours typically provides you with the most favorable interchange rates, particularly with an interchange-plus processor. By implementing these operational adjustments, you can minimize your processing fees and save your company time and money.
Steps to Ensure Easy Processing of Merchant Services Agreements
To begin with, ensure that you understand your business model, such as transaction volume and industry-specific risk, clearly. This ensures that both you and the provider mutually agree on terms that are feasible.
Also look for a balance where the fees are favorable to you, particularly if you’re processing large volumes of transactions. Don’t be afraid to negotiate lower fees if you’re processing lots of payment, but also make sure you’re covered against fraud and chargebacks. You’ve got to be communicative, so always ask questions regarding the pricing, fees, and conditions to ensure that everything is clear.
Lastly, engage the services of legal advisers early in the process. An attorney who is experienced in merchant services can assist you in identifying areas of potential trouble and ensure that everything is in accordance with laws and regulations, so that the process flows more smoothly from beginning to end.
How to Escape a Bad Merchant Agreement
If you’re stuck in a bad merchant agreement, don’t worry—you can still make a change. The first step is to do some basic math to figure out if it’s worth breaking the contract.
Begin by contacting other vendors to compare prices. Find out what you’d be charged if you were to switch vendors. Next, look how much time you have remaining on your current agreement and calculate the cost of termination, including any early cancellation fees.
If the potential savings from converting to a new merchant is greater than the cost of canceling your existing contract, it may be worth paying the penalties and converting. But if it’s not, it might be best to carry out the remainder of your contract.
Tip: If you do choose to cancel, be sure to abide by the conditions of your existing agreement to avoid any extra fees.
Conclusion
Getting a merchant service contract without any hidden charges takes time and attention to detail, as well as honesty and transparency. Knowing the conditions, seeking the correct questions, and comparing providers can save you from surprise costs and negotiate a contract that suits your business requirements. Proactiveness and honesty will facilitate you in developing a long-term, low-cost partnership with your payment processor.
FAQs
What are hidden fees in merchant service contracts?
Hidden fees are charges such as monthly minimums, early termination fees, or extraneous service fees that are not well disclosed.
Can I negotiate a merchant service agreement?
Yes, you can negotiate contract length, early termination fees, and pricing tiers to fit your business.
How do I identify hidden fees in a merchant agreements?
Carefully read through the contract for suspicious language or extra fees that are not clearly defined, and request clarification.
Is it ever a good idea to terminate a merchant agreement early to save paying high fees?
If the savings from a better provider are greater than the penalty of early termination, it might be worthwhile to change providers.
If I'm in a bad merchant agreement, what can I do?
Compare prices with other processors, compute the cancellation fee, and find out if changing will cost you less in the long term.