Rapid adoption of new payment products and services over the past decade has made it increasingly challenging for merchant service providers to keep pace with advancing market demands. To keep current and competitive, payment processors have become increasingly dependent on white-labeled inventions of third-party technology providers. From multifunctional POS software to recent bitcoin and mobile commerce technologies, third-party products have been integral to the payments industry's blueprint for meeting merchant and consumer needs. Indeed, today's merchant services companies are seeking groundbreaking product technology so they can position themselves for attention in the crowded payments sphere.
As progressive hardware and software companies have continued to emerge, each of them introducing a distinct version of the latest and greatest application or machine, so has the need for greater due diligence in the selection and negotiation process. This is due not only to the growing number of third-party solutions available, but also to a growing concern about innovative technology providers entering the payments world without adequate industry experience and knowledge.
"Quite often a small startup is the entity with the greatest idea," said Dennis M.P. Ehling, Partner at the Los Angeles branch of Blank Rome LLP. "Then they have to deal with how to implement." This after-the-fact challenge has propelled more than one dispute into the courtroom in recent years. Several other cases have been settled out of court through arbitration, but the pain was still felt by the adopter whose investment of time and money will never be fully recovered. Some are still reeling from reputational and market share damage caused by a failed relationship.
Moreover, due to the complex, multitiered hierarchy of the payments industry, faulty technology often impacts many parties, at times spiraling all the way to the end user. This presents added complexity when it comes to ownership and who is ultimately responsible when a particular technology fails. While an obvious answer is to point to the maker of the technology, the creator may not be equipped financially to bear the risk of high-profile data breaches, bad reconciliations or lost transactions.
Ehling suggested that to reduce the impact a failed relationship can place on a payment provider, as well as potential ownership and risk pitfalls, companies adopting new technologies should establish strict guidelines for assessing all third-party entities and the products they offer. Ehling said it all boils down to one critical question: What is the technology you do not control? Once this answer is determined, an evaluation team should identify potential areas of friction in the relationship with the technology provider and possible points of failure in the architecture. Then, together, the parties involved can deem who will be responsible for what. Treatment of identified variables can be written into solid contract language that addresses failsafe measures, collaborative troubleshooting and effective risk management.
Ehling also proposed that to gain more control over the day-to-day risk, a strong auditing clause should be written into each contract. "Insist on transparency with no circumstances where the transaction data is not available or you can't see absolute reconciliation every day," he said. In addition, he advised that companies exercise audit rights to maintain complete insight into how their systems are working. An effective auditing process, taken seriously by all parties involved, will serve to protect everyone and potentially ward off problems before they can occur.
In addition, Ehling stressed the importance of collaboration. Bring the experts into the room so they can work together to identify all project requirements, consider what could go wrong and how that might happen, and decide what the projected solutions should be. All parties to the contract should come to the table expecting future challenges and do all the preliminary legwork to identify who might be affected, as well as how and where the buck is going to stop.
These practices will help payment companies protect their business interests while allowing them to reap the benefits of working with innovators who offer both technology and partnership strengths, Ehling advised.
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