Contracts
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Prerequisites
Before reviewing contracts:
- Understand your current effective rate
- Know your risk profile and volume
- Review underwriting basics to understand approval requirements
The rate is the easy part. The contract language is where you get hurt.
Junk Fees vs. Real Costs
Every processor has fees. Some are legitimate. Some are padding.
Legitimate Costs
| Fee Type | What It Is | Typical Range |
|---|---|---|
| Interchange | Card network cost, non-negotiable | 1.5-3.5% |
| Assessments | Visa/MC fees, non-negotiable | 0.13-0.15% |
| Processor markup | Their profit margin | 0.1-0.5% |
Padding to Negotiate or Avoid
| Fee Type | What It Is | Action |
|---|---|---|
| PCI compliance fee | Monthly charge for "compliance help" | Often removable if you're compliant |
| Batch fee | Per-batch settlement charge | Should be $0 or pennies |
| Statement fee | Paper statement charge | Request electronic, remove fee |
| Minimum monthly fee | Charge if you don't hit volume | Negotiate away if possible |
| Annual fee | Yearly account charge | Often removable |
| Gateway fee | Separate from processor fee | Ask if included in rate |
Reality check: A processor with a clean 2.5% all-in is often cheaper than one quoting 2.2% plus seven line-item fees.
How to Calculate All-In Rate
All-in rate = Total fees / Total volume
Example:
- Volume: $100,000
- Interchange: $2,100
- Assessments: $140
- Markup: $300
- PCI fee: $25
- Batch fees: $15
- All-in: $2,580 / $100,000 = 2.58%
The "2.2% + $0.10" quote became 2.58% after all fees. This happens constantly.
Contract Gotchas Beyond Pricing
Early Termination Fees
- Range: $0 to $500+ or "liquidated damages" (percentage of remaining contract value)
- Watch for: Multi-year contracts with steep ETFs
- Ask: "What's the early termination clause, and what triggers it?"
Reserve Release Schedules
- What it is: Processor holds a percentage of your volume as protection
- Typical holds: 5-10% of volume, released 30/60/90 days after transaction
- Problem: Cash flow crunch if you're growing fast
- Ask: "Under what conditions do you increase my reserve? What's the release schedule?"
Related: Holds and Reserves for detailed guidance
Volume Commitments and Rate Reversion
- What it is: "You quoted me 2.2%" becomes 2.9% if you don't hit volume targets
- Watch for: Minimum monthly volume requirements
- Ask: "Are rates conditional on volume? What happens if I miss the target?"
Auto-Renewal Traps
- What it is: Contract auto-renews for another year unless you cancel 30-90 days before
- Problem: Miss the window, you're locked in
- Ask: "What's the notice period for non-renewal? Can we do month-to-month after initial term?"
Liability Language
- What it is: Who eats the loss on fraud and chargebacks
- Watch for: Broad indemnification clauses
- Ask: "What's my liability cap for fraud losses?"
Contract Negotiation Checklist
Before signing, confirm these items in writing:
| Item | What to Look For |
|---|---|
| All-in rate | Explicit, including all fees |
| ETF | Ideally $0 or capped |
| Contract length | Avoid multi-year without exit |
| Auto-renewal | At least 60 days notice |
| Reserve terms | Clear release schedule |
| Volume requirements | No rate reversion traps |
| Token portability | Can export stored cards |
| PCI/compliance fees | Removed or justified |
MCC Implications
Your Merchant Category Code (MCC) affects more than you think.
What Your MCC Affects
| Impact Area | How MCC Matters |
|---|---|
| Interchange | Some MCCs qualify for lower rates (grocery, utilities) |
| Reserve requirements | High-risk MCCs face higher reserves |
| Processor tolerance | Some processors won't touch certain MCCs |
| Chargeback thresholds | High-risk MCCs may have lower tolerance |
| 3DS requirements | Some MCCs require 3DS in certain regions |
Common MCC Misclassification Problems
- Selling supplements under "general retail": Works until chargebacks spike, then you lose your account
- SaaS coded as "computer services": May miss out on subscription-friendly interchange
- Multi-product business with wrong primary MCC: Your main product should drive the code
When to Request MCC Review
- You've added product lines that don't fit your current code
- Your chargeback pattern doesn't match your MCC
- You're paying higher interchange than similar businesses
Underwriting and Approval
What happens after you sign the contract? The processor underwrites you before you can start processing.
See Underwriting for the complete guide:
- What documents you need (and why)
- Risk factors processors evaluate
- Common rejection reasons and how to fix them
- How to graduate from low limits to higher volume
- Ongoing monitoring and how to avoid holds
Where This Breaks
-
High-risk MCCs with limited options. Sometimes there's only one processor willing to take you, and they know it.
-
Rapidly scaling businesses hitting reserve triggers. Growing 10x in 6 months? Your processor will notice and hold cash.
-
Contract signed without reading. The ETF and auto-renewal you didn't notice will cost you.
Analyst Layer: Metrics to Track
| Metric | What It Tells You | Target |
|---|---|---|
| All-in effective rate | True cost of payments | Under 2.5% for most US e-commerce |
| Reserve as % of monthly volume | Cash flow impact | Under 5% unless high-risk |
| Time to document response | Relationship health | Under 24 hours |
| Contract renewal date | Avoid auto-renewal trap | Calendar reminder 90 days out |
Next Steps
- Calculate your current all-in rate → Reading Statements
- Review your contract terms → Check ETF, auto-renewal, reserves
- Prepare underwriting documents → Have them ready before applying
- Plan for ongoing compliance → Set up document refresh process
See Also
- Processor Selection - Choosing the right processor
- Underwriting - Approval process and requirements
- Integration & Exit - Technical and exit planning
- Holds and Reserves - Cash flow impact
- Reading Statements - Understanding fees
- Processor Management - Ongoing relationship