The Great Recession has shaken the payments industry in many ways. Consumer spending is down, reducing transaction volume; inflation and unemployment are up; and many financial institutions are struggling to remain solvent. However, one effect that has drawn frequent complaints from merchant level salespeople (MLSs) is the vulnerability of their residual streams.
Stories have surfaced about late or reduced residual payments to MLSs by their ISOs or merchant acquirers. Some companies have been accused of terminating MLS agreements entirely or otherwise altering agreements arbitrarily to offer lower compensation to MLSs.
In "Dude's got my money: What can I do?" The Green Sheet, July 27, 2009, issue 09:07:02, Payment Attorney Theodore F. Monroe stated, "I receive two or more calls per week from ISOs or MLSs with the same complaint about some contractual counterparty higher up in the processing chain: 'Some dude's got my money and won't give it back.' I seldom received these calls before September 2008."
Indeed, anxiety is widespread. "I hear of this at least once every two days," wrote MLS Forum member The Dustman. "Granted, many have varied agreements, but there are more than just a couple who are genuinely getting jilted." Even MLSs and sub-ISOs whose bottom lines have been affected only by lower overall transaction volumes are wary.
According to many payment veterans, the tension stems primarily from a minority of unscrupulous payment organizations willing to take unethical or illegal underwriting risks. And the pain they cause MLSs is real.
Carrie Hometh, Senior Vice President, Sales and Marketing, North America for payment and security solutions provider Payvision, has noticed an uptick in resellers sending in applications for high-risk accounts. "Some of these merchants are what I call untouchable, and they shouldn't be boarded by anyone," she said. "It's just going to blow up in the form of fines and potentially harm the sponsoring member.
"The unscrupulous ISOs and acquirers in this business are approving them, but in the long run they are looking at millions of dollars in fines or being closed down. What I want to say to those ISOs that send that business and put pressure on their processor or acquirer to accept it is 'what's going to happen to your residuals now?' What they are doing, really, is nothing but jeopardizing the very hand that is going to continue feeding them."
Hometh believes all parties in the payment chain share the responsibility to avoid underwriting merchant accounts that could jeopardize their livelihoods. And this includes MLSs.
According to Jay D. Reeve, Payment Attorney and founder of The Reeve Law Firm PC, the MLSs complaining that their ISOs are not paying them have, for the most part, created their own problems.
"Yes, there is a problem in the industry with residuals being withheld, but a lot of the blame belongs to the MLS," Reeve said. "They either don't read, don't understand or don't care what their MLS agreement specifically says. When they sign it to begin a new relationship, there are a lot of provisions in there that they could and should negotiate out, but they don't pay attention. They don't spend the time on the front-end to try and understand what they're signing up for."
Reeve added that when MLSs are pushing business to two or more ISOs, one or more of the contracts could be subject to an "event of default" if, for example, the contracts call for exclusivity on the part of the MLS. Additionally, contracts can be terminated and residuals withheld in the event of a breach by a merchant in an MLS's portfolio. Residuals can also be terminated "for cause."
But these problems can often be avoided simply through communication, negotiation and compromise.
"MLSs need to clarify what default is and isn't as well as what their definition of 'cause' is, which can vary from agreement to agreement," Reeve said. "They can negotiate 'cure periods' that give them the ability to correct a merchant breach, not get their contract terminated, and preserve their residual streams. You also need to be able to respond to fraudulent applications and do whatever is necessary to negotiate for something different and better.
"The smart, big ISOs and acquirers out there want to make sure that the best MLS stays with them, but it is also the responsibility of that agent to be as open, honest and loyal as possible."
Reeve believes responsibility is not the MLS's alone. "There is equal culpability on both sides in these situations because many organizations, to attract the best MLSs, will promise a little more than they're actually willing to deliver. Both parties need to be upfront, play by the book and not try to get fancy."
Scott Zdanis, Co-Chief Executive Officer of payment processing services firm Merchant Warehouse, said he hasn't heard of ISOs arbitrarily changing contract terms. He recalls disputes were rampant in the days of exclusive agent agreements, but he feels that since most MLSs today are nonexclusive, ISOs must have transparent, negotiable contracts that offer the most attractive and equitable provisions.
"ISOs can't get away with changing agreement terms because the top-notch MLSs will write new business elsewhere," Zdanis said. "Exclusivity is a thing of the past, so we have to earn our agents' business every single day. Our agent channel is 30 percent of our business, so we've built a contract that treats residual income as our MLSs' assets, not just as a benefit of an ongoing effort to sign more accounts."
Zdanis added that contract terms industrywide are improving for MLSs because ISOs, processors and acquirers are becoming more educated and competitive.
"As the margins thin with increased competition, you have to offer financial stability, experience and proven quality operations to keep the best and most productive people and build a stable financial foundation," Zdanis said.
"The best contract in the world doesn't matter if a company goes insolvent or no longer exists. And the most important thing to Merchant Warehouse is having our agents know they can count on their residual income and that it will always be there."
To help negotiate the fairest contract, prevent residuals from being terminated, find the most reputable companies and secure the greatest leverage over an ISO or processor, Zdanis suggests MLSs do the following:
Reeve added that when an MLS agreement re-negotiation is approached ethically and honestly, the end result can benefit both parties. He said that in November and December of 2009, he worked with an MLS who wanted to start his own ISO. The agent went to an acquirer, negotiated an agreement and brought it to Reeve.
"When I tell most ISOs what I cost - what any payments attorney would cost - they either don't want to do it or just want me to make a quick pass, which serves no one," Reeve said. "Well, this new ISO and I spent enough time together so that I could really understand what was important to him and drill down to specific issues.
First and foremost was the preservation of his residuals. We were able to narrow his contract down and specifically define the termination provisions.
"We clarified with that new acquirer what would and wouldn't be an event of default. And within each of those we were able to get an opportunity of notice to cure any event that would normally result in termination. And in the process [my client] realized that ISOs and acquirers want their best street agents to stay healthy and stay with them. So now he knows he has the opportunity to fix problems that may arise and not just wake up one day to find out that he's not getting his check."
Theodore Svoronos, Vice President, Business Development & Strategic Partnerships with Group ISO Inc., believes that withholding of residuals, use of hidden fees and inclusion of vague termination provisions in MLS agreements are not new practices, but they have become less prevalent.
And the only way to eradicate unscrupulous behavior is for all ISOs, processors and acquirers to diligently follow best practices.
"You have to do business following rules and regulations and structures of procedure," Svoronos said.
"Being a company that keeps its word is so important in this day and age. With the down economy, this is the absolute worst time to do anything negative toward your partners. Accommodate your agents. It's not about us, it's about them.
"You need to run an even-keeled ship so that those agents stay confident and motivated. You stop paying residuals, terminating contracts, then giving the 'if, this, then, that' routine, then all you're doing is making it worse for them, giving the industry a deeper black eye and slandering your own name. Now more than ever - good and bad, thick and thin - you stick by your practices. Whatever the residual, pay it."
According to Ken Musante, Vice President and Chief Sales Officer for payment processing firm Moneris Solutions Inc., one consequence of the recession will be a greater differential between what a smaller ISO has to pay to attract and retain the best MLSs and what a larger acquirer has to pay. Before the downturn, smaller and mid-sized ISOs effectively only had to match the payouts of larger institutions.
"I don't know exactly how it will manifest itself, but I see the overall take-home is going to be less for somebody that is doing business with a larger acquirer," Musante said.
"There is a risk premium that is going to have to be paid by smaller ISOs looking to do business with top-flight MLSs. And it's obviously a correlation between risk and reward as the industry evolves.
"Remember that the residuals an MLS is paid are only as strong as the company paying them, so it's critical that agents know the financial wherewithal of the acquirer or ISO that they're doing business with. Residuals are worthless if you've got a faulty contract, so you darn well better make sure that contract is well written."
One note rang true with these payment veterans: It is paramount that MLSs do not move accounts, the lifeblood of the ISO.
"If you're a partner of Group ISO, we split 50/50 on interchange with no fee padding," Svoronos said. "But we have a provision in there - as would any financially stable and well-managed ISO - which basically says that the accounts you board are your accounts. You will get paid for the life of the account. As long as they stay with us, you'll get your check. But do not take those accounts. If you have a qualm, you need to give us the right of first refusal, or I'll put my fangs in."
Svoronos said he would never wrong an MLS and doesn't know anyone in this business who would. And he expects the same respect in return.
"As long as those MLSs do good business with you and are treated fairly and respectfully, you won't hear a peep out of them," he said. "And I don't care who it is, my job is to help them be successful, which ultimately benefits us all."
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