December 23, 2014
by David Goodale
How to cancel an unfair credit card processing agreement.
I spend a lot of time on this blog talking about things to help prevent merchants from being taken advantage of. However, what about merchants for whom it's too late? What if you are stuck in an unfair credit card processing agreement?
Without sugar coating it, if you are stuck in an unfair processing agreement then you are likely in a tough spot. Every merchant account provider has different terms and conditions which make up their processing agreement with your business. For that reason, I can't speak to the specifics of your agreement. (Although I am happy to speak to you about the specifics of your situation.) Fortunately, even without getting into the nitty gritty of your unique situation, there are some helpful things in common that every business owner can use to their advantage.
Before we begin for a general disclosure: I am not a lawyer and nothing in this article is intended as legal advice. It's just general feedback that I hope proves helpful in your situation.
How can a credit card processing agreement be unfair?
We should start by stating that "unfair" is a subjective term. In this discussion, we are going to concentrate on the two most frequent and damaging complaints that people have: high rates (being charged more than you expected), and being locked into a contract term that you didn't expect.
The situation I dread seeing the most is when a good honest business owner is taken advantage of by an unscrupulous credit card processor. What I am talking about is bait and switch pricing. Bait and switch pricing occurs when a credit card processor offers tremendously appealing rate... that the merchant never ends up actually paying. Instead, they are charged a much higher discount rate than they were expecting. This all stems from a pricing model in the credit card industry called qualified and non-qualified pricing. There is nothing inherently wrong with that pricing model, but it is extremely confusing and can be abused by some processors to advertise a misleadingly low rate and actually apply a higher one to the merchant. I have an entire article dedicated solely to the topic of interchange and credit card pricing which is strongly recommended reading if you are not already knowledgeable on the topic.
Rates aside, the other most common complaint in relation to cancelling a credit card processing agreement is when a merchant is locked into a contract term without having known (or been notified) that there was a contract term attached to the agreement. In these cases it's usually occurred because the business owner didn't read the agreement at all. I do not say that in defense of the credit card processor, because the merchant should have been made aware. However, it's also a sign that the merchant didn't read the agreement before proceeding, which is something I critically implore all business owners to do before working with a new credit card processor. At Merchant Accounts.ca we give our clients a choice. The agreement is monthly by default, and for larger / more established businesses that want to enter into a longer term we offer a lower rate. There are other situations as well in which a longer term is desirable. Although it's beyond the scope of this discussion to get into it in detail, we can generalize that banks like long term clients and often reward with better rates and terms of approval as a result. In general, we leave it to the client to decide what they want. There is absolutely nothing wrong with having a 2, 3 or even a 5 year processing agreement so long as the contract was entered into it knowingly it was fair to both parties. For example, if you are processing millions of dollars per month and your processor offered to reduce your rate by 0.10% because you committed long term, then this is a win-win for everyone. However, if you operate a young business that got unexpectedly wrapped up in a long contract term with big monthly fees then it is definitely a problem.
While these are just two of the most popular complaints, the reality is that no matter what your problem is your options are limited if you have signed the merchant agreement. If that is the situation you find yourself in, we can now explore what your options are...
What can you do?
Canadian merchants have a leg up on businesses in other countries. That is because Canadian merchants are fortunate to have the credit card processing industry code of conduct to rely on. This is a merchant protection policy that all credit card processors must abide by. The unfortunate reality is that a code of conduct shouldn't have been needed at all, but there were enough unscrupulous processors taking advantage of merchants that the government interceded, thus the code of conduct was born. The advantage though, is that because the code of conduct exists in Canada it gives Canadian merchants a protection that non-Canadian merchants do not have. Furthermore, the protection that it gives in terms of rate increases is fairly iron clad. (Business owners in other territories need not fret, as you do have other options, but the code of conduct is a surefire winner if your business can qualify.)
Credit card processor increased your costs? The code of conduct is a guaranteed way out!
The best protection in the code of conduct is that if a credit card processor raises your cost structure in any way, you can cancel immediately (within 90 days of the cost increase notification) absolutely penalty free. Some payment processors (especially junior agents) are not aware of this, or may not be so willing to admit it. So, when you bring it up be prepared for some resistance. Make sure that you have notification of the cost increase in writing, and with that you can cancel penalty free per the code of conduct. If you are a Canadian merchant, this is probably the single best tool in the toolbox for cancelling an unfair credit card processing agreement.
Have you spoken to your payment processor about your concerns?
Although it may often seem obvious to say it out loud, it's important to point out that resolution may be only a phone call away. There are lots of good, reliable credit card processors out there. For the record, I want to mention at least once in this article that at Merchant Accounts.ca we have an excellent reputation, and if a client was ever upset the first thing we would want is for them to call us! The topic of this article is really intended for folks working with another processor that might not be treating them fairly.
Let's just jump to the point: have you brought up your concerns? Most folks in the payments business, especially if you have an account manager that you have gotten to know, will want you to be happy. The first step is to open the lines of communication. If you feel that you aren't getting what you expected you must look into what is going on and explain your situation. There is a reasonable chance that they can address the concern for you, or make it right for you. Not all credit card processors will do this, but the good ones will, and it's silly to try a dramatic escape to a processing agreement without at least speaking to your current processor to address the problem first.
Canadian contract law.
I am going to qualify this one paragraph by stating that I'm not qualified to give legal advice. However, I remember speaking to a kind lady (who later became a client), and she told me how she escaped her processing agreement from another processor. What had happened is that they had given her the old bait and switch by providing a low rate in the "qualified" box, but had left the "non-qualified" box blank. Later, when she asked for her countersigned version of the agreement the salesperson had written a really high rate in the "non-qualified" pricing field - after she had signed it! This is an extreme example, and is blatantly wrong from any conceivable ethical standpoint. This was clearly NOT a good processor, and they seemed to think they had this woman stuck. However, she pointed out that the sales person had visited her home in person on her day off to do the paperwork. Under Canadian contract law, if an in-person sale occurs in your home, you always have a 10 day cool-off period in which you can cancel. She used that to get out of the agreement. This was something I hadn't heard of previously. I won't comment too much because I'm not qualified to speak on this topic from the legal perspective. Instead, I'll just provide the hyperlink to the Canadian Consumer Protection agency where you can read up a little bit on your own.
Can't escape? Renegotiate!
There will be some situations, quite unfortunately, that a credit card processor will have you locked in. They might refuse to play ball, and you probably feel like a voiceless customer standing in a long queue of customers. (Which, for the record, is a terrible way to feel - the payments business is competitive and you should be valued for your business!). What can you do if you are stuck? Well... if you can't leverage the code of conduct to cancel, and if they won't address your concerns when you ask reasonably, then it's time to roll up the sleeves and get into an old fashioned renegotiation.
Let's start by pointing out that you must have a set term for your merchant agreement. Most likely it's a multi-year agreement. (I am assuming you are stuck on a multi-year agreement otherwise you could just cancel with one month's notice, apply somewhere else, and wouldn't need to read this article.) What you should do is start by figuring out how many months are remaining on your contract term. Once you know, you can ask them if they will lower your rate if you will re-sign a new longer contract term.
Let's get it out of the way and state that this is not ideal: you are rewarding the processors bad behavior. They didn't treat you right, and they are getting to keep your business, possibly for even longer than before! But, in this article we are exploring the options to consider when you don't really have any good options. Renegotiating is the one thing you will always have in your favor. The processor should want your business, and want it long term. That is a card in your favor. However, if you are playing that card it's ultra critically important that you damn well better make sure that you are getting a major benefit out of it! I really mean it, and I want to hammer it home. If you have already had a bad experience with a processor once, shame on them, but if it happens twice, shame on you. Make sure you read the agreement thoroughly to ensure you'll get exactly what you expect from a rate and service perspective. My very strong (and I really mean STRONG) suggestion is that if you renegotiate your pricing make sure it's changed to an interchange plus pricing model, or a flat pricing. Avoid qualified/non-qualified pricing at all costs or you will probably end up in the same boat all over again.
My suggestion is to start the negotiation by asking if they are open to having you sign a longer contract term in exchange for a lower rate. This will likely be more effective the further you are into your existing contract term. If there are only a few months remaining they should be very motivated. If you just started they may not be as receptive and you'll have to work some silver tongued magic to get them to be receptive to the idea. The trick is to get into a meaningful discussion with someone who has the ability, interest and desire to help you. If you can get that done, then you can likely renegotiate and salvage the situation. However, let's be honest: this is probably the least desirable "solution" because you are still stuck with the same processor, and at this point you probably don't want to work with them anymore. This is a very good time to point out that cutting your losses and jumping ship may not be as bad an option as you thought...
Is it time to jump ship even if you have to keep paying monthly fees at the old processor?
The whole point of this article is how to get out of or cancel an unfair processing agreement so you don't have to keep paying monthly fees for a service you won't be using. What if you do have to keep paying them though? How bad is it if that happens? You might consider paying those monthly fees the cost of a lesson learned, right? However, did you know that the actual "cost" of that lesson doesn't have to be as bad as you thought?
You have to work the numbers. A typical credit card processor will have a monthly fee somewhere between $20 to $100. It really depends on your trading volumes, processing currencies, etc. However, the point is, it's often not the end of the world. ESPECIALLY once you take into consideration your cost savings at the new processor.
You need to do the math to see if the cost savings at the new processor will counterbalance the fact that you must keep paying monthly fees to the old processor until your contract with them expires. Let's take a moment to think about it: if your business is processing relatively decent volumes (I am thinking anything over $20,000 per month in sales), you should be able to get enough of a cost savings at the new processor to offset the monthly fees you are still paying at the old one. The higher your credit card volumes are the more easily you can save enough to offset the cost of moving to the new processor, even if you have to keep paying monthly fees to your old processor. If your existing pricing is complicated and have a hard time understanding it, I suggest you read our article titled how to analyze your credit card processing statement to see what you're really paying.
The only danger is in the merchant agreement with the old processor. Some of them may also charge extra fees such as your average monthly discount rate fees - even though you are no longer processing! It's a tactic to try to prevent you from doing exactly what we are exploring here in this discussion. Most processors do not do this though, and if not you can basically jump ship and need only worry about the monthly fee at the old processor. There is also an ethical component to it too. If they didn't treat you right, do you really want to continue working with them? Long term, you will almost certainly do better at the new processor, and once that old contract term expires at the previous processor you'll be doing even better.
Do you need help? Who can you talk to?
If you feel you are really being taken advantage of it should go without saying that you might want to speak to a lawyer. However, this type of claim would require very specialized knowledge. For example, a lawyer with a high level of expertise in the field of payments law is Adam Atlas. However, a legal action can be very expensive and most processing agreements are very bank-sided. It's a good idea to start by simply getting another industry professional to break down your pricing, and address your other concerns. Maybe you will find out that you aren't being treated so badly after all. Getting a knowledgeable professional opinion will give you confidence in terms of knowing whether your complaint against your current processor is valid or not.
If you would like an impartial opinion or advice (and not legal advice), you are welcome to contact me by email or phone to discuss your situation. I can usually provide helpful feedback, at least in terms of breaking down the rates you currently have, and helping you to determine whether you are being treated fairly or not at your current processor.
I always tell people to research their chosen processor before signing the contract. Hindsight is often 20/20, and it can be a very hard thing to deal with after the fact. I realize that my advice offers little value if you have already signed and are trying to deal with it after the fact.
One thing in particular to look out for is to make sure that your processing agreement doesn't have an exclusivity clause locking you to just to that processor. Many agreements actually have this for a very valid reason - so a merchant doesn't farm chargeback risk out to many different processors just to escape being shut down. However, using an exclusivity clause to unfairly prevent a client from moving to a new processor if the service is not satisfactory is not in the spirit of what a clause like that should be meant for. Unfortunately, if you are with a less scrupulous processor the odds are they might be more willing to enforce clauses unfairly in order to exert control over your business. You have to be methodical in how you proceed.
You are not powerless though. Stay positive and start by getting educated in terms of what you are currently paying, what you are receiving in comparison to what you expected to receive, and then start looking at what your options are. Whether it's leveraging the code of conduct, talking to your representative at the processor, renegotiating, or simply walking away and bringing the business to a new processor.
More than anything else, remember that most credit card processors value their clients. There are many good and honest payment providers here in Canada. We certainly do value our clients here at Merchant Accounts.ca!
If you are not happy start by engaging in an earnest conversation with the best contact you have at the processor. Address your concerns directly, but not confrontationally, and if you follow the advice in this article I hope that you will end up in a much better situation once the dust has settled.
If you haven't reviewed your processing costs in a while take a moment to view our rates.
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