By Adam Atlas
Attorney at Law
Having advised on over 1,000 ISO and agent agreements over the years, I think it's time for me to share some of the most striking legal blunders I have observed ISOs and merchant level salespeople (MLSs) make. The point here is simply to learn from the mistakes or misdeeds of others to make your ISO or agent business better.
Handshake deals are never good. Even if the parties remain the best of friends throughout the relationship, there may be confusion as to the specifics of a relationship that would be better served by a written document to refresh the memories of the parties involved.
When a relationship sours, the absence of a written agreement makes any dispute especially difficult because the parties often have a hard time both proving the existence of the relationship, as well as the terms of that relationship.
When parties cannot prove the specific terms of an agreement, with a written agreement or clear proof of the terms, a court will usually look to the industry custom as a source of likely terms for the relationship. Proving the industry custom usually requires hiring expert witnesses to prepare reports and educate the court as to how the acquiring industry and its agreements usually work. Experts are very expensive and will increase the cost of litigation.
Some parties have a written agreement but rely on a handshake for an amendment to the agreement. Relying on an oral amendment to a written agreement is problematic in exactly the same way as failing to have an underlying agreement in place.
Written agreements drafted by competent counsel are, of course, best. However, some writing is usually better than none when trying to prove the existence of an ISO or MLS relationship. It is also worth noting that payment network rules require ISO and agent agreements to be in place.
ISOs and MLSs are sometimes so grateful to be paid that they overlook the reporting provided or available to them – as a tool for verifying if they have been properly paid. An ISO should be able to track the amounts paid by each one of their merchants all the way through to the residuals paid on those merchants individually.
Comfort with numbers, spreadsheets and data are all assets for ISOs and MLSs. Super-ISOs and processors have rather awesome power over the numbers concerning merchants. Having a controlling hand in the reporting allows them to present information that is most beneficial to them. This makes it all the more important for ISOs to really know their business and be capable of challenging super-ISOs or processors on the accuracy of their reporting.
ISOs that fail to understand the reporting provided to them have missed out on tens or hundreds of thousands of dollars of revenue.
Most ISO and agent agreements contain non-solicitation clauses. Those clauses are part of the consideration given by ISOs and MLSs in exchange for their residuals. It's always difficult to know that a merchant placed under a given agreement could earn you twice as much at another processor.
That said, ISOs must always think about the possible consequences under their agreements for moving merchants. Some ISOs and MLSs make the blunder of moving merchants in violation of their contractual obligations. To be clear, some processors or super-ISOs renege on their obligations to pay residuals, which might vitiate the obligations of ISOs or agents under them. That said, all parties in the industry have to weigh their rights and obligations under their respective agreements to see that they do not make the blunder of violating a key obligation.
Just like some parties push the limits on their non-solicitation undertakings, others push the limits on their obligations to pay residuals. When stopping to pay an MLS means the doubling of an ISO's income on a portfolio of merchants, the temptation to find a "gotcha" moment in the agent relationship is great.
When MLSs stop receiving payment, those unpaid residuals are often the bulk of their overall income, and the agents often lack the resources to legally challenge the wrongful termination of residuals. This places residual payers in a rather stronger position – a position that can be abused. It is a blunder to abuse that position because:
The ease with which ISOs can cut agents loose without serious consequences sometimes clouds their judgement and allows their less-than-perfect inclinations to get the better of them.
The FTC has recently taken action against ISOs that misled merchants. The federal CFPB has pursued an ISO and processor for allegedly assisting in dubious collections business. The acquiring industry is on notice that it is not immune from being the target of investigations as to its own wrongdoing and the possible wrongdoing of its merchants.
In order to avoid the blunder of misleading merchants or assisting merchants who mislead consumers, participants in the payments industry should step back from their businesses to ask themselves if their practices are honest and if they believe that their merchants are operating legitimate businesses.
The flash in the pan of a large residual payout on a dubious account is not always worth the risk associated with either misleading the merchant or assisting a merchant who depends on misleading the public.
To be fair, pricing in the merchant acquiring industry is extremely complicated and many merchants are probably at a loss as to how to understand their merchant statements. That does not provide license, however, to push the limits on integrity.
In conclusion, the key blunders listed herein arise when parties indulge in classic ethical wrongdoing like lying, stealing and being greedy. I don't want to sound like a preacher, but a baseline of ethical standards and common sense can bring an ISO a long way toward avoiding serious blunders.
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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