credit card processing service agreement

What to Look For in Your Credit Card Processing Service Agreement

October 20, 2022

At this point, you should be aware that the credit card processing industry is mostly made up of smoke and mirrors. There is minimal openness about how credit card processing fees work, what your organization will spend as an expense to process cards, and the specific terms around opening a merchant account with different merchant service providers. Therefore, it is important to understand the credit card processing service agreement that is the basis of any association with the provider company.

Just because a sales representative tells you something verbally does not mean that the same verbiage will be reflected or included in your agreement. Whether you own a bakery, restaurant, retail store, or professional services firm, your customers have high expectations, particularly regarding the forms of payments you accept and the simplicity of the transaction.

Offering your customers more payment alternatives can mean the difference between you making a sale and a customer turning elsewhere. This is why selecting a merchant services provider is so important. Choosing a provider who can assist you in meeting your customers expectations is critical to the success of your organization.

How Does a Merchant Service Agreement Work?

When signing up with a merchant services provider for a merchant account to process credit and debit cards, there is a process that they are responsible for when enabling your business to process payments. During a transaction, the acquiring bank performs the following processes to process and accepts electronic payments as part of the merchant processing agreement: These are important factors that are covered under the credit card processing service agreement.

  • The credit card is swiped, chipped or tapped
  • The acquirer obtains the card information from the payment terminal
  • This acquirer, a financial institution, transmits the data to a payment processor
  • The Card Association then communicates this information to the bank that issued the card
  • The transaction is approved or denied by the issuing bank
  • If the transaction is approved, the credit card association sends a code to the issuing bank
  • The identical code is sent to the acquirer
  • The code is subsequently transmitted to the merchant’s credit card machine
  • This code authorizes the transaction, and the payment terminal can generate a receipt for the customer
  • The merchant will have funds deposited into their account in the following 48 hours

What to Look For in Your Merchant Credit Card Processing Service Agreement

Termination fees

The first thing to look for in your credit card processing service agreement is the charge that you will have to pay when you terminate the agreement.

You can be charged an early termination fee if you cancel your merchant account before the agreed-upon date. Many merchant services agreements include a termination fee; however, in recent years, more businesses have shifted to a month-to-month deal with no cancellation penalty.

Early termination fees range from $295 and $750. Some companies demand this fee even if your company closes or is sold to a new owner. Keep in mind the amount of the termination cost, if any. Depending on the merchant services provider that you select, the early termination fee is only negotiable sometimes. Clarify with your merchant services provider whether or not they will charge you a fee if you decide to cancel early.

Liquidated damage clauses

A liquidated damage clause in the agreement might make switching processors nearly impossible. A liquidated damages clause states that if your company ceases to process, the merchant services provider will charge you for the amount of profit they estimate to receive during your contract term. Liquidated damage clauses are important and an integral part of a credit card processing service agreement.

Assume your merchant services provider earns $500.00 monthly from your company in credit card processing fees. For example, if you signed a three-year contract with a merchant services provider, but after 18 months you have to close your business, your merchant services provider will charge you for the difference, in this case, an additional 18 months, of their expected profit based on your contract. That would be about $9,000.00. Make sure that your merchant services agreements do not have liquidated damage clauses.

Contract length

Confirm the term length of the merchant agreement you are considering before moving forward with opening an account. If there is a term, it is typically three or five years. There should be a contract length specified in the merchant application. However, as long as an early termination fee of $0.00 is listed, opening an account with most merchant service providers should be considered a month-to-month agreement.

Red Flags in Merchant Service Agreements

merchant using credit card machine

Below are some examples of what red flags to look for in a merchant credit card processing service agreement.

High fees and extra charges

The majority of the complaints concern discriminatory charges. Some payment processors charge merchants for early termination or PCI compliance. For example, the usual charge for early termination is roughly $400. However, numerous merchants have complained online about paying much more in the name of early termination for merchant services providers across the industry.

Contract cancellation

Many processors levy an early contract termination cost. However, this also occurs when an annual fee is charged. Suppose the processor does not charge an early cancellation fee. In that case, they may charge on a month-to-month basis, which is considered preferable to annual contracts if you are just starting with their services.

Charging an early termination charge is an unjust business practice. Some merchant service providers make their cancellation process so difficult that if you wish to cancel, you will be bounced from department to department until you give up and continue to use their services.

Non-cancellable agreements

Leasing POS terminals or payment gateways might be significantly more expensive than purchasing them. Certain processors require you to pay for the entire lease term, rendering the contract non-cancellable. Ultimately, their true cost is many times greater than the cost of purchasing the gateway or processing equipment yourself.


credit card processing

If your company accepts credit and debit card payments, having a thorough understanding of your merchant agreement is critical to your success. As a business owner, you have the authority to select a partner that best meets your requirements and works with you in a transparent and honest way. Review your agreement or contact your merchant services provider to ensure you are making the best decision for your company. To make sure that you are getting the best terms and rates possible, make sure that when you are having these conversations to have read all of the fine print and to address all of your concerns when negotiating.

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