MSP Contract Series Recap: Tips to Protect Your Business
During the past five weeks, we’ve shared pointers to protect your company in payment processing terms and contracts. To summarize our series of posts, we’ve provided the following article to serve as a guide on this topic. We hope you find this information valuable to your business. If you’d like additional information on these blogs, please contact us by clicking here.
A Guide to Payment Processing Terms and Contracts
After nearly 15 years assisting businesses in payment processing solutions, MSP Consulting has reviewed many variations of contracts and programs on behalf of clients. We are well familiar with the broad range of terms and conditions that come with these contracts and have run across some truly remarkable and abusive terms. Our team has helped many businesses avoid abusive terms as well as renegotiate these types of contracts, finding a fair compromise.
We would like to pass along some information and tips; hopeful that we can help others avoid entering into abusive and restrictive agreements.
Most contracts are fundamentally similar in overall structure, but when you get into the details, the specific terms can vary widely. It is critical that certain clauses are verified to head off potential issues up front.
Often these details are listed in separate, massive terms sheets. These sheets aren’t even included in the primary application documents, but are simply referenced in hope that no one cares enough to track down that information. When you do receive a copy of these separate terms sheets, you’ll discover that they are strategically written to be lengthy and difficult to read.
Make sure you request these terms sheets and review them for the following clauses and fees:
- Agreement period– Most contracts with a payment processor have a three-year duration, and this is not particularly unreasonable. It is important, however, that you negotiate a suitable termination fee, should you need to terminate the contract early.
- Early termination fee– Most contracts will have an early termination fee of roughly $150 to $200, and while we typically negotiate these fees down to $0.00 for clients, we do not consider this range particularly unreasonable. Some contracts we encounter, however, can tout termination fees that reach $500 and beyond. Even worse, in some cases, damages clauses may be built into the fine print that would obligate a business to pay the provider any fees that would have been incurred through the end of the term, even though the business may no longer use the service. Clearly this is unwarranted and out of line.
As a general rule of thumb; the more abusive the termination fee clause, the more abusive the actual charges and pricing for the program will likely be.
- Bundle rate pricing– Many providers simply combine various fees into bundled rates to simplify the fees and make it easier for sales agents to market the services. The reality is, however, that the bundled rates generally result in excessive fees and creates a lack of transparency in the actual costs incurred. This is, due to detail terms that often allow up-charging for nebulous qualifications set by the sales channel. Often these bundled rates are sold as “qualified or non-qualified,” or “Tier 1, 2 or 3.” MSP Consulting, strongly discourages agreeing to a bundled fee structure, instead pointing our clients to cost-plus or interchange-plus programs that are more transparent and easier to compare Interchange are paid to the card brand (Visa, Mastercard, Amex, etc), and an interchange-plus program passes through interchange at cost, making it visible on the monthly merchant statements, in detail. The visibility allows interchange to be monitored and optimized; any markup above interchange is separated out and shown on its own.
- Lease equipment charges– In the past, we profiled the disadvantages of leasing terminals and payment equipment. Suffice it to say, equipment leases are expensive and not needed.
- Ancillary fees– The core fees a business should pay are interchange (including dues and assessments), processing fees and sales channel fees. Beyond that, it is important to truly understand any additional fees that are layered into a provider’s solution. A detail “schedule” of fees should be requested that profiles all types of fees included. We often find fees that are simply mark-up charges that help the provider make the account more profitable for themselves.
- Pricing changes– Processors often weave in clauses that will allow them to change pricing over time. Card brands themselves update interchange fees, and it is expected that processors would need the freedom to adjust accordingly. However, all too often, we find processors hiding behind reasonable business practices like this to inflate processing or equipment fees. Therefore, ongoing monitoring of the merchant account and fees becomes important to maintain control of cost over time.
MSP Consulting takes the time to thoroughly vet these fees to make sure that they are reasonable for our clients. Often, we find many other fees unnecessarily added on, and thinly veiled.
Far too many companies over-pay in fees because they do not understand what each fee represents and whether that fee is appropriate. Sales groups hide behind confusing terminology and wordy contracts, preying on the average person’s unfamiliarity with the service to charge unnecessary fees.
With proper diligence and escalation, we have had success to establish reasonable terms can get the issues resolved.