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The Green Sheet Online Edition

January 13, 2014 • Issue 14:01:01

Legal ease
ISOs going paperless – a legal perspective

By Adam Atlas
Attorney at Law

Industry observers have been predicting the end of paper in acquiring for about a decade. And paperless signup of merchants is finally taking hold in a way that makes it increasingly normal. The U.S. Federal Electronic Signatures in Global and National Commerce Act (E-Sign) provides that, subject to certain conditions, electronically executed documents are legally binding in the same manner as hard copy documents executed by hand signature.

In simple terms, those conditions are:

  1. The electronic signature is associated with the agreement and related documents.
  2. The signer consents and intends to be bound by the agreement and related documents.
  3. The agreement is delivered in an electronic record capable of retention by the recipient at the time of receipt (that is, print or otherwise store the electronic record).

Now I'll discuss issues for ISOs to consider in relation to paperless contracts for specific types of payments industry relationships.

Processor and ISO

The contract between a processor and ISO is a heavily negotiated legal agreement. As such, it should not be treated as a document in which the parties simply fill in their names. While I have yet to see a processor provide for the electronic execution of an ISO agreement, there is no reason not to do it � provided the drafts are editable throughout the negotiating process.

Paperless ISO agreements might be beneficial in terms of recordkeeping for all parties concerned. Today's pen-signature agreements are usually scanned anyway, with the electronic scan being the definitive copy for party records.

ISO and agent

Here again, agreements are ripe for being rendered paperless, provided the parties are able to negotiate terms before acceptance. ISOs could benefit because transitioning to paperless agent agreements would vastly improve their records on individual agents. Where agent agreements are formed electronically, there could be an easy tie-in to agent pricing, thus ensuring that agents are correctly paid. That kind of transparency benefits all parties and makes the legal agreements stronger.

Bank, processor and merchant

Here is where we have seen the greatest advances in paperless contracting. A number of acquirers are able to allow ISOs and agents to board merchants through a paperless sign-up portal. Note that there are no fewer terms and no fewer pages to be accepted in the paperless scenario than in the regular paper scenario.

That said, it's easier to keep track of 50 electronic pages accepted by a merchant than 50 pages waiting to be faxed to the ISO and then on to the acquiring bank. A paperless boarding tool should permit the portal to be branded with the name of the registered ISO so as to help build the brand of the ISO in the marketplace.

The tool is also best when deployed in a collaborative format that would allow the agent to populate a merchant signup form in the presence of the merchant, on an iPad or laptop, with the merchant being able to review and accept the terms on the spot.

Concerning rendering bank and processor merchant agreements electronic, it is important for each party to agree to this process. An ISO could be in for a rude surprise if a bank has not consented to electronic contract formation, when the ISO has migrated bank paperwork into an electronic sign-up portal. This is not to say that such contracts will necessarily be invalid. Instead, electronic contract formation without consent of all parties will pose serious challenges related to the contracts' enforceability.

If your processor does not have a paperless contract formation solution, meet with the processor to discuss a timeline for implementing one. Without this kind of added efficiency, you could lose out to competitors that can sign up merchants with greater ease.

Advantages of paperless agreements

Moving beyond specific industry relationships, it is useful to have a sense of the advantages of electronic contract formation for all parties concerned. First, the whole contract formation and acceptance process can be reliably documented. Merchants often complain of never having had a chance to see all the terms and conditions of their merchant agreements; that problem is nipped in the bud by a well-built electronic contract formation platform. Similarly, when an ISO wants to sell its portfolio, a buyer will look highly on a portfolio with electronic records of each merchant contract formed.

Second, speed and accuracy are greatly enhanced in the paperless format. ISOs know all too well the hazards of recopying an address five times in a set of paperwork. Errors of recopying information are often eliminated when the copying is done electronically rather than by hand. Finally, as soon as the contract is formed, all parties can receive a copy either by email or through a dedicated link � putting everyone on the same page at the same time.

Downside of going paperless

The downsides of paperless contract formation can be largely mitigated by fair mindedness and secure systems. That said, it's worth considering why you might choose to avoid paperless contract formation. First, a security breach of your contract management system puts your whole portfolio at risk � including sensitive information on merchants such as Social Security and bank information.

Second, the speed and convenience might lead merchants or others to accept terms without reading them. That said, parties, such as merchants, should be encouraged to take the time to read the applicable terms before accepting them. Some paragraphs could even include individual mandatory checkboxes that must be checked to evidence that the merchant has read the paragraph.

Third, user error can be amplified. For example, a single contract sent to the wrong fax number is one thing. An entire portfolio of agreements that is accidentally shared with a third party could lead to compromising a lot more than one agreement.

On balance, I think paperless is the way to go. Merchants' business and personal activities, including social media, are increasingly online and even being used as underwriting tools. Greater availability of paperless contract information would serve the acquiring industry well. end of article

In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. For further information on this article, please contact Adam Atlas, Attorney at Law email: atlas@adamatlas.com, phone: 514-842-0886.

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