Startup business owners who are ready to take the next step and set up a merchant account for credit card acceptance need to do their homework to avoid an ecommerce nightmare. Credit card processors provide business owners with a merchant account to collect funds from credit card sales. Business owners must be aware credit card processing companies charge fees for this service.

To avoid common mistakes made by startup businesses, read this article and do your research.

Read the Fine Print

As is true with many businesses, there are a few unscrupulous credit card processors who will take advantage of uninformed business owners. Before signing the Terms and Conditions (T&C) agreement it is important to read the fine print in the contract. The T&C of a contract governs all aspects of the relationship between the processor and merchant.

Though the T&C is usually long and somewhat boring to read, not reading it can have a major impact on your business and requires the full attention of the business owner before signing the contract. If you don’t understand the complicated legalese or if the T&C is complicated it is well worth the cost of having an attorney look over the contract before signing on the dotted line.

Watch for red flags in the T&C. If something just doesn’t seem right, raises concerns or questions you must get clarification from the processor before proceeding with the contract.

Ask About Hidden Fees and Surcharges

The contract terms may seem confusing and it is important to understand how they will affect your business, especially fees charged for processing credit card sales. Make sure you know the actually pricing being offered by the processor.

An unscrupulous salesperson may quote a rate that does not include the cost of ecommerce sales leaving you to believe that the discounted rate is the amount charged for all sales. Some processors may offer merchants a flat processing fee but this is rare and fees may fluctuate based on the type of card used. If the pricing sounds too good to be true it probably is and you should ask questions before signing the contract.

Knowing how fluctuating fees affect your processing fees is of utmost important before signing. Fees can fluctuate depending on interchanges, the type of card used, if the card is a corporate or premium card or if the card has been issued in a foreign country. It is perfectly legal for processors to charge fluctuating fees but the processor should disclose this information in the T&C. Again if the rate seems too good, ask questions and make sure you understand the terms before you accept the explanation. Processors can also legally charge surcharges for processing certain types of credit cards as long as the surcharges are outlined in the T&C

There are two types of processors: a company which has staff who manage accounts and are able to answer questions and allay concerns. The other is volume driven or has a staff with a sales quota to meet and is usually poorly trained work from a sales script and is not able to provide answers to pricing questions.

Make sure you understand fees, surcharges, and clauses in the T&C and that all of your questions are sufficiently answered before signing the contract.

Contract Term and Early Cancellation Penalties

It is important to understand that the processing agreement is a legal contract between the processor and the merchant and is enforceable in court. The duration or contract term varies by processor and all major credit card processors in Canada and United States have contract terms. The only exception is Paypal because they aggregate transaction through their merchant account rather than supply a merchant account.

Contracts protect both the merchant and the processor. Cost protection is the major protection provided in the contract.

The processor must do a background check on merchants also called “know your customer” (KYC) to make sure the business doesn’t have a history of fraudulent business practice. The KYC includes:

• Credit reporting
• Technology costs
• Delinquent fees

Each of these checks require significant effort and incur costs for the processor.

Processor contract terms in Canada are usually three years and three to five years in the United States. In Europe the term is usually shorter at an average one year.

Merchants who cancel the contract early are subject to a early termination fee. Generally the fee charged by processors is based on the monthly processing fee. For example if a merchant cancels the contract after two years the processor will charge a termination fee of the monthly processing fee times the 12 months remaining on the contract. If the fee is $100 per month the termination fee would be $100 X 12 or $1,200. This is only an example not an actually termination fee amount.

Sales Volume Commitment

Processors may require merchants to have a minimum monthly sales amount to satisfy the processing contract. If this minimum is not met, the processor can charge an increased rate. This practice is rarely enforced in Canada and Europe but is a prevalent practice in the United States. If this condition is included in the T&C it is not fair for a startup business and should be evaluated carefully before signing the contract.

Conclusion

When reviewing the T&C of a processing contract it is important to carefully review and understand the terms and conditions of the contract before signing the contract. If you don’t understand terms in the contract ask questions, if you still don’t get answers ask an attorney to review the contract. And finally if the terms and conditions appear too good to be true they probably are.

As a business owner it is your responsibility to be an educated and informed consumer.