House Bill 777

The Problem:

Unfortunately, a few bad apples in the payment processing space have given the entire industry a bad reputation.  While the standard merchant services agreement is a three-year contract with a $495 cancellation fee, most business owners don’t know that until they go to cancel and are assessed or threatened with a penalty.  The reason they don’t know it is because this fee often isn’t disclosed on the agreement that they sign.  Rather, the signature page will say something like, “By signing this document, you are agreeing to our terms of services which can be found here:” and then there’s a URL to a .pdf document that is often 75+ pages long. Buried deep within that document are the terms of the contract.  These include but are not limited to the cancellation fee(s), liquidated damages, and renewal terms.  Even worse, some companies require you to be an account holder and login to view/download the terms of services agreement.  So, you have to agree to terms and services that you cannot review until after you’ve agreed to them.  That’s not only absurd, it’s unethical.

From left to right: Jaron Rice (CEO, Magothy Payments), Senator Kramer, Delagate Howard, and Cailey Locklair (CEO, Maryland Retailers Association)

For clarification, liquidated damages are fees/fines assessed to the small business because the merchant services provider (MSP) is claiming that by the merchant going elsewhere, they are causing financial harm to the MSP, thus they’ll assess an additional fee for the remaining time on the agreement.  The fee is anywhere from $25 to $250 per month for every month remaining on the cancelled agreement.  So, if the MSP states in the terms and services that the cancellation fee is $495 and the liquidated damages are $100/mo for every month remaining on the contract, a business that terminates their agreement 12 months in with 24 months remaining, will be assessed a total penalty of $495 + $2400 = $2895.

Again, none of this is, nor was, disclosed to the merchant at the time the agreement was signed.  To make matters worse, the MSP will often make the agreement automatically renew if it isn’t cancelled, and they usually only give a 30-day window in which it’s allowed to be cancelled without penalty.  Then, when the agreement renews, the fees and penalties reset – leaving the business owner essentially stuck.

The Solution

On April 30, 2019, Governor Hogan signed HB 777 into law after it passed through both the House and the Senate unanimously.  This legislation is the most comprehensive of its kind in the entire nation and will protect Maryland small business owners from the underhanded sales tactics of banks and merchant services providers.  Hopefully, it will become a template for other states to use to shape the industry nationwide. The law took effect on October 1, 2019, and will apply to agreements that are initiated or renewed on or after that date.

HB777 was created to bring more transparency and fairness to the payment processing industry. It requires that the length of the contract, the cancellation fee(s), liquidated damages, contract renewal date, and contact information for the MSP be conspicuously listed on the agreement that the business owner signs in 12pt bold font, and each term needs to be acknowledged by being initialed. The bill also requires that the merchant be provided with a copy of the agreement (either physically or digitally) at the time the agreement is signed.

Furthermore, HB777 caps the total penalties of early termination at $500.  This includes the cancellation fee, liquidated damages, and any other fees associated with terminating the agreement.  It also mandates that the MSP must notify the merchant in writing 60 days before their agreement is renewed.

Lastly, it does not allow MSPs to reset their cancellation fee(s), liquidated damages, or any other penalties upon renewal of the agreement.  This means that once a merchant has completed the original term of the agreement and it renews into an additional term, the MSP cannot charge any fines or penalties if the merchant cancels the agreement and goes with another provider.

This bill applies to any bank, merchant services provider, independent sales organization, or any of their affiliates, subsidiaries, and representatives regardless of where said companies or persons are located.  It protects any business located in Maryland that has 50 employees or less and processes $2 Million or less in credit card transactions per year.

If a bank or MSP offers a month-to-month agreement with no cancellation fees or any other penalties for canceling the agreement, they are not bound by this legislation.

House Bill 777 is enforced by the Commissioner of Financial Regulation under the authorities granted in Title 2, Subtitle 1.  The fines assessed are up to $10,000 for the first offense and up to $25,000 for each subsequent violation.  The full text of the bill can be found here.

Any business that believes their bank or merchant services provider has violated this law is encouraged to report it to the Commission of Financial Regulation:

500 North Calvert Street, Suite 402
Baltimore, Maryland 21202
Telephone: 410-230-6100 or 888-784-0136
Fax: 410-333-3866 or 410-333-0475