Getting the Most From Your Merchant Account, p.3 collection


Retailers looking for favorable merchant accounts are faced with a situation similar to that in the cell phone industry: multiyear contracts. “More than 90% of contracts are for three years with automatic renewals,” says Rianda. That can be bad if you find a merchant account with a better price—the most common reason why retailers want to exit contracts early. Yet departing’s not an easy task, says Rianda. If you get caught in one of these contracts, it’s difficult to get out. “One of the biggest issues is the early termination fee,” says Rianda. “Some ISOs don’t have one. Others will charge maybe $300 for the early termination of the three-year contract, which is typical for the industry.” But there is something far more damaging for merchants. “Some contracts call for what is called ‘liquidated damages,’” says Rianda. “The merchant who cancels after one year may have to pay the estimated processing fees for the remaining two years. The penalty calculation is a multiplier of the merchant’s average processing fees prior to the termination.”

Rianda estimates that around one in four ISOs includes liquidation clauses in a contract. They can be expensive, with total penalties running into the thousands of dollars. Note, too, that many contracts prohibit the retailer from shopping around for a second merchant account—presumably a cheaper one—to operate in parallel for the period in which the first merchant account is in effect. ISOs rationalize these fees by asserting their need to obtain a return on the processing equipment they have invested with their retailers, or on their need to rationalize attractive sales incentives. One solution is to look for new, hungry entrants to the ISO world. Newer providers tend to be more open to negotiations. You might even find one willing to cash out your old contract. “ISOs who want you to switch over may offer to pay your termination fee,” says Lynch. “Just be aware that they have to make up that $300 or $400 somehow. That may well be in higher fees.”


Search around a bit and you may find an ISO willing to offer a contract with cost-plus pricing. This term refers to a processing fee based on a specified markup from current interchange rates. That can make a big difference when compared with traditional tiered pricing that’s based on a confusing array of markups determined by the type of card presented by the customer. “Cost-plus pricing has traditionally only been available to larger merchants,” says Rianda. “But in this competitive environment, I see it being offered more often to smaller retailers.” Despite this trend, many retailers are still tied to a tiered pricing schedule because of loyalty to their banks, which typically do not offer cost-plus options. “Consider using an ISO not affiliated with a bank to get the best pricing structure available,” says Hearon. “And if you change your bank, you can keep your card processor.”

Given the rapid changes in the credit card world, it pays to keep a vigilant eye on your payments and to obtain outside help in the form of disinterested account reviews. “If a retailer has not had a complete analysis done within the last year,” says Hearon, “they are more than likely leaving money on the table and negatively impacting their bottom line.”

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