By Adam Atlas
Attorney at Law
From time to time, hearing of other people's troubles proves helpful. So, let's take a look at a handful of contemporary, ongoing or recently settled legal disputes in the acquiring industry. In presenting these disputes and some of the legal issues they raise, our goal is to help readers reduce their exposure to these conflicts. Naturally, the best of agreements and intentions are sometimes no bar to disputes.
Processor fee grabs are, far and away, the dispute of the season. New laws (for example IRS 6050W), new industry security requirements (such as the Payment Card Industry security standards) and new card company fees (for example, the Fixed Acquirers Network Fee) have all had a jarring effect on ISO agreements. Many agreements were not drafted with these new and unforeseen fees in mind.
Thus, the nexus of disputes over these fees is not that they must be charged. Instead, it is whether or not - and to what extent - a processor can seize upon these intervening fees as an opportunity to mark up the new fees and tinker with the fine balance between processor, ISO and merchant.
If a contract expressly provides a processor the right to charge new fees, mark them up and take those amounts from ISOs, the ISO facing such fees is in a weak position. More commonly, however, the ISO's agreement with the processor is ambiguous on that point, or actually prohibits the imposition of new fees without the consent of the ISO.
The purpose of negotiating an agreement for a set term precisely is to protect the parties from adverse surprises. A considerable number of ISOs in the field no longer feel that comfort. The new laws and fees are indeed an inconvenience for all. Yet their implementation is becoming more of a test of the integrity of processors than anything else.
Let's be clear on this point: Not all fee increases are prohibited. On the contrary, our industry has a long custom of absorbing interchange increases and other fees that are outside the control of the processor and the ISO. Yet some ISOs are jarred by the packaging of new fees as take-it-or-leave-it bundles, the marking up of new external fees, and the invention of internal costs that are apparently unjustified.
The main lesson from these disputes is to revisit existing ISO agreements - specifically their fee amendment language and fee schedules - to see how new, unforeseen costs will pan out. If the agreement's language contains the slightest ambiguity, the parties are enrolling themselves for disputes.
To be clear, very few people who lose all their residuals acknowledge that they got what they deserved. Every residual termination has its story. Rather, it has two stories - one from the payer who stopped paying and one from the payee who lost his or her income.
With those disclaimers, I still see instances of the termination of residuals either not permitted by the contract or simply because the paying entity had a short fuse.
If an agent has committed fraud or wantonly breached nonsolicitation obligations, one would expect the applicable agreement to permit the termination of residuals. However, when a merchant can no longer tolerate the service of a given ISO or processor - following notices of discontent signaling that the merchant is on the way out the door - the ISO may be expected to be somewhat more understanding if the agent seeks to move the account.
I speak here not of the wording of the contracts in question, but instead of an ISO's courtesy, which should take into consideration an agent's frustration in seeing a merchant walk out the door.
The main lesson from these disputes is to pay attention to the wording of the clauses in agreements by which residuals survive termination, to see that they afford the ISO its rightful protection, but that they do not permit arbitrary residual termination.
More importantly, however, agents and ISOs need to know each other well enough to foresee how the other might react when a troublesome scenario arises - such as the merchant that has one foot out the door. Note that some ISOs have allowed such merchants to leave, prevented the agent from soliciting the account, and then re-solicited the account through another brand. This is perhaps the bitterest form of deceiving an agent, short of wrongfully stopping residuals altogether.
When an ISO meets its minimums - in merchant count, revenue or otherwise - no discussion of minimums arises. However, when an ISO does not meet its minimums, a legitimate discussion ensues as to why it failed. The first and natural place to look is the ISO's own business plan.
Some ISOs are spectacular failures. The best examples are ISOs that base their business on the personality of a celebrity or well-connected individual. Of course, such a person generates a substantial initial book of business. However, once that person's Rolodex is spent, the ISO may have no effective program to continue boarding new volume. Naturally, this kind of ISO is the author of its own failure to meet minimums.
On the other hand, an ISO may have a very strong business plan and generate many applications and accounts, only to be limited by some service failure or technical incapacity of the processor.
For example, one processor could not board merchants that signed ISO branded applications with the same speed as its own in-house applications. The ISO had the right to brand its own applications. But exercising that right stalled the boarding process, thereby stunting the growth of the ISO.
The lesson here is for ISOs to test their business plan stress points on a processor prior to signing the ISO agreement. Then, early in the relationship, make sure the processor is able to deliver on its claims. The element of surprise disappoints ISOs more so than a processor's failure to perform.
Some reporting is long; some is short. However, some reporting contains inconsistencies within its own numbers that the processor itself cannot explain. This places in jeopardy an ISO's trust in the processor. There are too many instances of processor reporting errors, processor billing errors and sluggish bureaucratic responses to ISO complaints.
Sure, some ISOs can't be bothered to fuss over a penny here or there. But for those who do and for those for whom many pennies are in play, processors really need to improve their reporting.
This is not the 1980s, when one could blame computers for faulty reporting. Some believe that processors revel in the confusion created by their own systems, allowing them to sweep up many pennies obscured from the view of the ISO.
Obviously, insistence on complete and accurate reporting from the first month onward is mandatory for all serious ISOs. I wish there were fewer disputes, and I hope this rant will help you find ways to avoid some of them.
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 email@example.com or call him at 514-842-0886.
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