By Patti Murphy
Merchant level salespeople (MLSs) who build profitable merchant portfolios know how to understand merchant pain points and sell solutions that address them. Most, however, are not attorneys. That can cause problems, as their fortunes typically are tied to the particulars of contracts they sign with upstream partners. And those contracts are anything but simple.
"The opaque nature of the acquiring business lends itself to companies taking advantage of people without [adequate] information, such as sales agents and small ISOs," said Theodore Monroe, a Los Angeles-based attorney specializing in payments law. "A lot of ISOs and agents trust their processors." But for those [processors] it's a business, and they can and do take advantage of downstream partners, he added.
"The little guys don't know what they don't know, and they can be easily duped," noted Holli Targen, a partner in the Southfield, Mich., offices of Jaffe Raitt Heuer & Weiss, and chairperson of the firm's electronic payments law group.
Typically, those getting the short end of a contract don't realize it until something drastic happens, like residuals stop flowing in. It's hard to sue for a perceived contract breach if your $20,000 a month residual stream is cut off, Monroe said.
The best way to avoid this is to hire an experienced attorney to review contracts and help negotiate a better deal. It's far more cost-effective than hiring attorneys to file lawsuits. Hiring an attorney after the fact "can cost at least 10 times as much as getting one to look at the contract" before it's signed, Monroe said. Targen concurred, adding, it's "a good upfront investment" to have a contact reviewed in advance.
James Shepherd, founder and president of CC Sales Pro, suggested MLSs and ISOs can improve their negotiating positions by agreeing to compensation based on performance benchmarks, at least in the beginning. "When negotiating a contract, in order to get what you want, don't be afraid of performance-based ramp-ups," he said. "Just be realistic."
For example, Shepherd added, a contract might call for a 50 percent split of residuals until the agent reaches a set number of signed merchants per month, at which time they qualify for a 55 percent residual split. The split would continue to increase at predetermined intervals of monthly new accounts added. But even these arrangements can contain gotchas. "One thing to look for is whether the split can get reduced if you stop selling that many new accounts," Shepherd warned.
Integral to the negotiation process is the need for exit strategies should an ISO, MLS or upstream partner want out of a contract, as well as an understanding of what that means for residual streams. "All too often, the ISO or agent doesn't consider how it [the relationship] is going to end," Shepherd said.
What if an agent decides to retire, or worse, gets incapacitated? Contracts should guarantee residual streams for as long as merchants the MLS signed generate residuals for the upstream processor or ISO, Targen said.
That's not always the case, Shepherd added, stating, "The question to ask is what happens if a year from now I'm hit by a bus and I can't sell – am I still guaranteed my residuals? If they say yes, make them show you that in the contract."
Or what if an agent decides to sell a portfolio? Some upstream ISOs and processors want a right of first refusal. Shepherd suggested this can work to an agent's advantage, but only if the offer is for a good multiple. Targen advises clients to instead offer a right of first bid. "It's up to the agent to inform the ISO/processor of their intention to sell and give them an opportunity to bid on it. If they like the bid they can take it," she said.
Then there are forced exits. Anecdotes abound of ISOs and MLSs who discover, to their dismay, that an upstream ISO or processor owns their residual streams and can sell them at will, paying the downstream partner who sold the accounts a set multiple of monthly residuals – if anything at all. Another variation is when the upstream partner merges with another processor that the ISO/MLS doesn't want to work with – perhaps because of past bad experiences.
According to Targen, if an upstream partner sells its business to a larger shop, ISOs and MLSs should have the option to sell their book along with the processor and get paid for it, or continue to do business with the new owner.
Here are additional pitfalls to watch for when negotiating with upstream ISOs and processors:
What if a merchant becomes dissatisfied with the processor, perhaps because the processor lacks technology or services they require? If an upstream partner insists on a non-solicitation clause, include language in the contract that allows the ISO or MLS to move merchants under certain, specified conditions, Targen said.
Many processors and ISOs want to impose minimum payment amounts before sending out residual checks. "There's no reason for that," Targen said. If a processor insists on minimum payments, make sure they are realistic and for a limited period of time. Also, watch out for clauses stating residual cuts can be reduced or eliminated if totals fall below an established minimum. "The contract should be very clear in stating that the ISO/agent shares in all revenues derived from the merchant," Targen said, adding that some ISOs and processors can and do "monkey around with" this.
Indemnity clauses allow one party in a contract to sue another for monetary damages even if the purported harm was the fault of a third party (for example, a merchant). These should be limited to "direct damages," like out-of-pocket costs, and not inclusive of "special damages," like loss of profit, Targen noted.
Reasons for terminations should be clearly stated in the contract, and advance notification is a must. "It's important that agents not be put in a position of having to react in a panic," Targen said. "Four to six months advance notice of termination allows them enough time to get something else in place."
For more insights into issues associated with ISO/MLS contracts, check out the Legal Ease column by payments attorney and long-time Green Sheet contributor Adam Atlas. His most recent article associated with this topic, "ISO contract management in the digital age," is in our archives at www.greensheet.com/emagazine.php?issue_number=180601&story_id=5727.
Patti Murphy is senior editor at the Green Sheet and president of ProScribes Inc. Follow her on Twitter @GS_PayMaven.
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