Contract Terms to Avoid

Contract Terms to Avoid and How to Spot Them

Posted: January 9, 2023 | Updated: November 8, 2023

Merchant service agreements and the contract terms within it are vital for businesses to carefully review and consider. Many merchants often go to great lengths to evaluate all the different fee arrangements and learn the minutiae of tiered pricing and interchange plus.

They may look at all the payment processors that offer various platform integrations, the latest point of sale equipment, or all the additional tertiary services available. However, there are specific contract terms to avoid and understanding how to spot them is the cornerstone of the process of inquiring about merchant services.

In this article, we will explore why the merchant services contract is so essential and the different contract terms to avoid within them, such as service length clauses, early termination fees, liquidated damages, automatic renewals, and equipment leasing. Additionally, the language associated with these contracts will be highlighted so that merchants can understand what to look out for.

Contract Terms To Avoid- Why understanding merchant services contracts is so important?

spot avoidable contract terms

The legal relationship between the merchant and the payment processor will be based on the contract that is signed. The most impactful step a business owner can take is to read the contract they sign for their merchant account. Given how necessary payment processing is to businesses, we have identified three significant benefits of understanding merchant services contract terms below.

  1. The incentives of payment processing sales teams and merchant services providers don’t always align with the merchant. Often their incentives don’t even align with merchant services providers, the entity that has hired them. Usually, it’s not the sales teams’ fault as they are engaged and retained based on aggressive targets, and failure to meet them results in termination or closing less deals. So, it’s vital to identify how knowledgeable the sales agents are about the product of their specific company and particularly how the payments industry works overall. If they fail that test, it is primarily because the payment processor has not sufficiently invested in training the team and does not have a system in place for a long-term customer retention.
  2. Understanding the contract terms spells out what merchants are paying for. They will know what they are liable for and all the applicable fees. Most importantly, they can make an informed decision on whether it is a fair agreement.
  3. Finally, until the merchant has signed the dotted line, they can still walk away from the deal. Once merchants have read and clearly understood all that they will be responsible for, they still have the chance to walk away and take their business elsewhere where they may find a better alternative that they are more comfortable with.

Clauses for the length of service

This is also known as the term of the agreement. A typical term period of a merchant service agreement is usually three years. Although three years is the most common in the payments industry, some merchant service providers offer contract terms ranging from one year to as long as five years. After that, the length of services is continued on a twelve-month cycle that auto-renews annually.

It is important to note that clauses for the length of service within merchant service agreements are quickly falling out of favor. There are two specific clauses relating to the term length of the contract. One defines the term commitment, the period for which the merchant is contractually obligated to retain the merchant services account with the service provider. The second is the early termination fee, a penalty for ending the agreement before the completion of the term commitment. When negotiating the elimination of length of service clauses, both those clauses need to be waived and written into the contract.

Contract terms that specify term commitments are very unpopular with business owners as they are meant to prohibit businesses from quickly ending the arrangement in order to switch to another payment processor. Merchants are increasingly negotiating to have the term commitment waived and replaced with a monthly billing cycle. At Host Merchant Services, our payment processing service requires no term commitments. Instead of contractually binding terms, we rely entirely on our excellent customer service and low rates to retain customers.

Early termination fees or Liquidated Damages

Contract terms such as early termination fees are a penalty fee levied against merchants for ending their agreement before the contractually obligated term commitment is over. This is usually identified as a fixed fee ranging from $300 to thousands of dollars.

Do not rely on a verbal agreement to waive explicit early termination fees. The most egregious form of an early termination fee is liquidated damages. NEVER sign an agreement includes contract terms such as liquidated damages! This fee is assessed based on the average monthly payment processing fees multiplied by the number of months remaining in the term commitment. Ending an agreement with a merchant service provider that levies liquidated damages can be extremely expensive, specifically if the merchant has a high volume of payments processed and just recently started the contract with the payment processor.

The good news for merchants is that early termination fees and liquidated damages are one of the most common clauses in the merchant services agreement that are waived in a sales negotiation. However, it is vital not to rely on a verbal agreement to waive these fees but to have it written into the merchant services agreement.

Equipment leasing

Payment processors will often market equipment leasing of mobile card readers, countertop systems, or point of sale terminals. Although these leases carry no upfront charges as merchants don’t have to pay their total costs just as they are starting their business, the actual cost of that equipment throughout the duration of the lease may end up being much higher, usually four to five times higher than the original cost of the machines.

Furthermore, equipment leases cannot be canceled and often last the duration of the term commitment identified in the merchant service agreement, anywhere from three to five years—even more reason to clearly understand the contract terms before signing anything. In the event merchants decide to cancel their lease, they must pay the entire amount remaining in the lease.

To put it in perspective, most point of sale countertop terminals that make up those systems cost anywhere from $150 to $300. Most often, mobile card readers are either provided for free or cost no more than $100. A simple online search on sites such as Amazon or eBay can quickly provide comparable equipment rates that are offered in a lease.

Merchants need to ensure that the payment processor does not require proprietary equipment for payment processing. Once merchants have a list of compatible equipment, they can easily compare and shop around for the best rates.

Finally, merchants should beware of any offer for free equipment. What is marketed as free is, in fact, a convoluted form of a combined noncancelable equipment lease and term commitment that locks merchants into long-duration contracts at higher payment processing rates. Once again, carefully read your agreement.

Hidden fees

On top of the standard payment processing fees and the potential of early termination fees, there are myriad hidden fees that a payment processor can levy on a recurring basis. These regular or one-off fees are disclosed in the merchant service agreement. They simply need to be located, and therein lies the challenge.

Merchants can find most of the fees in the Merchant Application section of the merchant service agreement. Furthermore, the area of Terms and Conditions will most often disclose details of chargeback fees. It is essential to beware that many contracts include language, which gives the merchant the liberty to add additional fees not previously outlined in the agreement.

How do you get started? How to spot the contract terms to avoid

find contract terms to avoid

Most merchant service agreements are riddled with contract terms that should be avoided. Although business owners can identify those terms that need to be avoided, they still need to negotiate on those terms to a point where the contract becomes acceptable. With an industry ripe with disreputable participants, unfortunately it is on the merchants to ensure they are not treated dishonestly and unfairly. Below are some simple ways to get started.  

  • Foremost, read the contract! Carefully! There is no other way to say it. The only way to know that merchant service contracts have terms that need to be avoided and then use one’s expertise to spot them successfully is to read the agreement thoroughly.
  • Merchants need to set aside time to read a contract. They should be rested and be able to think clearly to understand all the legal verbiage with which contact terms are written. This is not a task that can be completed within 15 minutes. Instead, expect it to take at least a few hours, possibly three to four hours.
  • Take regular coffee breaks to maintain focus and remain tenacious when devoting time to reading a contract.
  • Use highlighters, post-it notes, and stickers to identify terms and clauses of importance or those which are confusing. Make notes of any clarification that may be required from the sales agent. When in doubt, make a note to request clarification – don’t assume anything!
  • Try to read a digital copy of the contract, which can be easily zoomed into, making reading the fine print more feasible. This also allows the reader to find important terms and conditions via the search function easily.
  • Also, get the physical copy of the agreement, mainly to track any changes that were added explicitly for you, such as any fee waivers.

Even if the payment processor is highly reputable, merchants must read the contract they sign. The idea is to be aware of what you’re signing up for and clearly understand all applicable charges and what the merchant is responsible for to avoid surprises.


Internet forums and the website of the Better Business Bureau are littered with complaints from merchants who said they were promised one thing by the sales agent, and the merchant service provider failed to live up to that promise. The most common response from the payment processor was, ‘It was clearly written in the contract. We can’t be held liable for the client failing to read it and having other expectations.’ Not reading the contract thoroughly and not understanding the terms outlined in it are the root cause of most disputes among merchants and payment processors.

It is crucial for business owners to understand what a merchant account agreement looks like and stipulates. Knowing how those agreements are structured, the important clauses and terms, and how they can be identified and interpreted is essential. Before signing a merchant service agreement, a merchant must be accurately familiar with the length of that service contract, how to cancel that service agreement, what penalties may arise as a result of that cancelation, and if there is a waiver policy for those fees.

That familiarity with important contract terms must be based on what the merchant has read in the contract and not what has been told or promised by the payment processor’s sales team. Merchants should also be familiar with the red flags and how to spot them. It is vital that such contract terms and strictly avoided.

We don’t live in an ideal world. Although the payments industry has come a long way, with many merchant service providers adhering to honest and transparent best practices, many payment processors still slip into contract terms that should be avoided. Building the acumen to spot those terms is an essential part of doing business as merchants increasingly depend on non-cash methods of payments for purchases.

Frequently Asked Questions

  1. What are some contract terms to avoid?

    It’s important to be cautious of contract terms that may be unfavorable or disadvantageous. Some terms to avoid include excessive termination fees, automatic renewal clauses, unilateral modification clauses, and broad indemnification clauses that place all liability on one party. Additionally, be wary of non-compete clauses that restrict your ability to work in the same industry after the contract ends and any terms that limit your ability to seek legal recourse in case of disputes.

  2. How can I spot unfavorable contract terms?

    To spot unfavorable contract terms, carefully review the entire contract and pay attention to the following aspects: termination clauses, renewal provisions, dispute resolution mechanisms, indemnification clauses, liability limitations, intellectual property ownership, non-disclosure and non-compete provisions, and any hidden or ambiguous language. Look for terms that heavily favor the other party or unreasonably restrict your rights. If you’re uncertain about any terms, seek legal advice to ensure you fully understand the implications and potential risks.

  3. What should I do if I come across unfavorable contract terms?

    If you come across unfavorable contract terms, it’s crucial to address them before signing the agreement. Negotiate with the other party to modify or remove the unfair terms to achieve a more balanced agreement. Communicate your concerns and propose alternative language that better protects your interests. If negotiations fail and the other party is unwilling to make reasonable changes, consider whether it’s worth proceeding with the contract or if it’s more prudent to seek other alternatives.

  4. Why is it important to avoid one-sided indemnification clauses?

    One-sided indemnification clauses can be problematic because they disproportionately shift liability and risk onto one party, typically the party with less bargaining power. Such clauses may require one party to fully indemnify the other party for any damages, losses, or legal costs, regardless of fault or negligence. This can leave one party financially exposed and vulnerable to excessive liability. It’s important to negotiate for a more balanced indemnification provision that allocates responsibility fairly based on the actual fault or negligence of each party.

  5. How can I protect myself from unfair contract terms?

    To protect yourself from unfair contract terms, it’s essential to be proactive and thorough in contract review and negotiation. Read contracts carefully and seek legal advice if needed. Clearly understand the terms and their implications before signing. Negotiate for more favorable terms, particularly those that mitigate risks and allocate responsibilities fairly. Consider including clauses that allow for termination or modification under certain circumstances. Remember that contracts are legally binding, so taking the time to ensure fairness and clarity is crucial for protecting your rights and interests.

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