The Green Sheet Online Edition
January 10, 2011 • Issue 11:01:01
Who owns the merchants?
In the payments industry the phrase "owning the merchants" is not readily understood by those unfamiliar with industry practices. Even experienced payment professionals often disagree on what it actually means. This article will discuss the ever-evolving definition of "merchant ownership" and give you tips about which ownership rights may be most valuable to you.
What does owning the merchants mean in concept?
A red flag goes up in my mind each time I am asked to draft an ISO agreement and my client informs me he or she has verbally agreed with the processor that the ISO will own the merchants. Drafting this arrangement on paper is easier said than done because the two parties often have not worked through the details of what owning the merchants really means.
I understand owning the merchants to mean that the ISO will, among other rights and obligations:
- Have the unrestricted right to move all or any portion of the merchants to a different processor and, as a related right, to direct the processor to assign the merchant agreements to a third party designated by the ISO at any time, including upon termination of the agreement
- Have the unrestricted right to sell the merchants to any third party
- Have a direct business relationship with each merchant and, as a related right, to be a party to the merchant agreements
- Control who communicates with the merchants and how such communication is performed
- Administer and control the merchant agreements and the relationships created thereby including decisions regarding the continuance, amendment, assignment or termination of each merchant agreement
- Own all transaction data derived by use of cards at a merchant's location, including transaction history, sales volumes, merchant identification information, etc. and, as a related right, to have the right to restrict other parties' use of such information
- Have control over new fees or fee increases charged to merchants
- Have the right to continue to receive residuals related to the merchants even after a processing agreement is terminated if the merchants are not moved to another processor
Or the ISO may have some combination of these rights, subject to card organization rules.
What does owning the merchants mean in practice?
If you were to ask the processor involved in the previously mentioned verbal agreement what it meant when it agreed the ISO would own the merchants, you would likely get a different answer than the list provided herein.
This is because merchant ownership means different things to different people. Even if your processor has agreed to allow you to own the merchants, the rights the processor will agree to give you in your contract can often be very different.
For instance, while the processor might be amenable to language that says the ISO owns the merchants and has a direct relationship with them, if there is a broad anti-assignment clause tucked away at the end of the ISO agreement (a clause that requires the ISO to obtain written consent before assigning the agreement or any right under that agreement), in effect the ISO might be prohibited from ever moving the merchants.
What kind of ownership is that? It's like buying a car that you are only allowed to sell if your boss gives you written consent to do so - at his or her sole discretion.
Even if you and your processor are on the same page regarding who owns the merchants, as well as what that means in practice, unless your ISO agreement clearly explains that agreement on paper, you have no guaranty that a third party will understand your arrangement the same way you do.
This is problematic. What if something goes wrong in your relationship with the processor and one party sues the other? In that case, a judge or jury might end up interpreting what your contract means.
The jury reading your contract probably has no working understanding of the payments industry, including the concept of merchant ownership, and thus would have no way to understand the agreement between you and your processor unless it is set forth clearly and simply in your ISO agreement.
Since no two groups of industry players tend to agree on specifically what merchant ownership means, the only way to protect yourself is to clearly define this relationship in the contract between you and your processor. If you don't, you might be in for an unpleasant surprise when you attempt to exercise your ownership rights.
Other related rights
Other rights related to merchant ownership include:
- Right to sell residuals: Although closely related, the right to sell your residuals under an ISO agreement is a separate right than the right to sell or assign merchants. Owning the merchants doesn't mean you automatically have the right to sell residuals related to those merchants.
If you want to be able to assign your residual stream now for a specified multiple, make sure your ISO agreement gives you the right, at any time, to sell your right to receive future residual payments relating to the merchants and that such language is included separately from the language specifying merchant ownership.
Additionally, your contract should specify if separate consent is required to sell residuals, as opposed to the right to assign the entire contract or the right to assign a portion of the merchant portfolio.
- Right to collect losses directly from merchants: Regardless of whether you own the merchants, if you are liable for any portion of merchant losses, protect yourself upfront.
Demand language in your ISO agreement that requires your acquirer/processor to assign their rights under merchant agreements to you to enable you to make a claim against the merchant directly for the amount of such merchant losses. Otherwise the merchant might argue that you have no right to pursue a claim directly against the merchant.
This legal defense is called privity of contract. It requires that only parties to contracts, not third parties, can enforce rights under such contracts. Here's how it works: imagine your neighbor refers a plumber to you because your faucet is leaking.
You enter into a contract with that plumber to fix your faucet; then for some reason you don't pay him. In that case, only the plumber should be able to sue you for losses, not the neighbor who referred the plumber to you.
If you are not a party to the merchant agreement, you could need your processor's cooperation to seek reimbursement for losses against a merchant who raises a privity of contract claim. Skip the headache and make sure your agreements contain clear, concise language.
To make sure you can exercise rights in accordance with your idea of merchant ownership, hammer out the details of what it really means to have merchant ownership so you, your processor and any third parties reading your contract see the same picture.
The recommendations herein are general suggestions; they are not a substitute for legal advice. For specific information, consult experienced legal counsel. Sarah Weston is an attorney at Jaffe, Raitt, Heuer & Weiss PC and advises businesses on contract and regulatory issues in the merchant acquiring, stored value, automated clearing house and payment systems industries. You can reach her at 248-351-3000 or at firstname.lastname@example.org.
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