Merchant Account Early Termination Fee (ETF) Explained:
What is an Early Termination Fee? An Early Termination Fee, also referred to as an Early Cancellation Fee or, simply, ETF, is a charge that is sometimes assessed by merchant account providers when a merchant terminates their credit card processing agreement before an agreed-upon end date. In many merchant contracts, Early Termination Fees are described as a provider’s compensation for the expenses related to closing a merchant account.
Early Termination Fees usually cost between $100 and $500, although they can be much larger (into the thousands) in contracts with Liquidated Damages clauses. In many contracts, the potential amount of the ETF decreases as merchants approach the conclusion of the term, which is usually three years. Alternatively, many merchant services providers offer agreements without ETFs. Early Termination Fees are sometimes not fully disclosed by sales agents, so merchants should read the fine print of any given contract before assuming it does not contain an ETF.
Proponents of ETFs within the credit card processing industry argue that many contracts today, such as cell phone agreements, include cancellation penalties, so these types of fees should be expected. ETF supporters also claim that processors should have some way of recovering funds from merchants who pay for a service for only a few weeks before canceling, which wastes time and resources.
Critics of Early Termination Fees point out that an ETF effectively functions as an arbitrary punishment for merchants who wish to cancel. This is especially relevant when an ETF is assessed for nothing more than merchant retention purposes (known as a “Retention ETF” within the industry) rather than to recover the cost of subsidized equipment, like with a cell phone contract. Critics also claim that merchant services providers are exaggerating the degree to which they are inconvenienced by early termination.
In practice, Early Termination Fees are a major cause of merchant complaints and can be so prohibitively expensive that merchants often choose to pay out the remainder of a contract than suffer a large one-time fee. Merchants should always bear in mind that, in many cases, an ETF is a negotiable contract term.