By Adam Atlas
Attorney at Law
ISO pricing is being re-jigged with serious implications for all ISOs and merchant level salespeople (MLSs). The list of triggers for price adjustments seems to be permanently in flux, but not always with just cause.
Annual fees, Payment Card Industry (PCI) Data Security Standard (DSS) fees, Internal Revenue Service fees, taxpayer identification number (TIN) matching fees and the new Fixed Acquirer Network Fee are examples of a trend that is putting into question some essential assumptions of ISO agreements.
A key purpose of an ISO agreement is to plan for unforeseen fees. As such, from a legal perspective, ISOs, MLSs and processors owe each other the extra bit of thinking that is required to allow for future implementation of unforeseen fees. The purpose of this article is to propose a paradigm that could be seen as reasonably acceptable to both parties to an agreement and that penalizes neither.
Parties to ISO agreements should expect that during the term of their agreements, new third-party costs will be instituted that will affect their pricing arrangements. For example, the payment networks, such as Visa Inc. and MasterCard Worldwide, may impose new fees applicable to one or more participants in the merchant acquiring space.
This kind of increase is common and thus anticipated within the framework of interchange. It is not so well addressed, however, in the context of other fees, such as monthly fees to merchants, taxes on merchants or third-party security fee requirements.
The idea of new third-party fees should be baked into ISO agreements. Naturally, the allocation of rights in respect to those new fees requires its own set of agreements.
Unless the parties have otherwise agreed, it appears reasonable that a new fee imposed on a processor without markup to the processor should be passed through to merchants. This makes for a suitable starting point from which processors and ISOs can agree on markups and sharing of revenue derived from such fees. Also, if there is no understanding on passing such fees through to merchants, the processors or ISOs may see them coming out of their own revenues, which does not seem reasonable.
If a payment network institutes a new fee, it makes sense that ISOs and MLSs should know whether the fee they are being asked to pay, or charge their merchants, has been marked up by the processor.
Without this transparency, any discussion of markups and sharing is lopsided, giving the processor an opportunity to double-dip on particular line-items. Given that the payment networks function like the infrastructure of our industry, ISOs should be able to look to them to publish their bank or processor pricing on items, such as interchange, that are generally charged throughout the system.
One of the big problems with transparency regarding some of the new fees is that processors have priced new items as a function of internal costs.
Internal costs are fungible and sometimes only marginally distinct from profit. In other words, when a processor says it costs $0.0x per transaction to perform one or another service, how can the ISO be sure the cost bears any connection to the true cost to the processor? We will never know, but we can still ask the question.
Some processors take a narrow-minded approach to markups on new items by charging significantly more to their ISOs than other processors do. This neuters the ISO's ability to compete for new accounts or save accounts that are being solicited by other ISOs offering lower pricing for new items for which fees are charged. Processors should delegate to ISOs the power to set the markup of any given item.
Assuming the ISO is given the unfettered right to set markups on the price for new items, then there needs to be an understanding about how those markups will be shared. Three options come to mind.
First, the ISO and processor can share the same income percentages as they already share for merchants, based on an aggregation of costs and residuals. For example, if a given merchant produces $100 per month, and 80 percent of that is usually paid to the ISO, then 80 percent of the markup on the new fee should go to the ISO.
Second, ISO and processor can agree on a 50/50 sharing of new markups, recognizing they may not necessarily fit within the broader pricing allocation. Third, ISO and processor may agree on a cap on the percentage by which the processor can mark up its costs on a new item. For example, a new item may be marked up 10 percent above the processor's third-party costs, after which the ISO can price the item and earn all revenue over such markup.
Processors are, of course, thinking of new services to add to their merchant offerings in order to improve revenue. That said, such offerings may not be aligned with what competitors are offering and may not be priced to avoid merchant attrition. As such, there is a good argument for ISOs being able to block such new products and services, at least during the current term of their ISO agreements.
For example, if a processor develops a new compliance program that involves PCI, TIN, the IRS, etc., the ISO should have the option of either rolling that program out or continuing to supply those items itself or through third parties, so as not to force the ISO into a new pricing paradigm mid-course.
You might think it is impossible to plan for changing pricing. This is not true. Most potential pricing changes can be categorized before they occur, and the resulting markups and revenue sharing can also be allocated in advance. Of course, some believe planning will not be effective and will penalize one party or another. That said, it is better to plan for price changes now than not to plan for them, given that pricing changes are the new norm in our industry.
In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If you require legal advice or other expert assistance, seek the services of a competent professional. For further information on this article, email Adam Atlas, Attorney at Law, at firstname.lastname@example.org or call him at 514-842-0886.
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