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The Green Sheet Online Edition

November 24, 2014 • Issue 14:11:02

Legal ease:
Don't get gouged by pass-through, pass-through, pass-through

By Adam Atlas
Attorney at Law

ISOs are accustomed to increases in interchange as a raw cost of processing for acquiring banks. ISOs are also accustomed to absorbing and passing through to merchants other increases in raw processing costs, such as gateway fees, postage, third-party processing fees and other definable third-party costs.

What ISOs should not get used to absorbing is arbitrary price increases that have no basis in processor costs or are tacked on to processor costs for no good reason. The purpose of this article is to discuss what ISOs can do to reduce the chances of being gouged by processors that institute arbitrary fees, fee increases and mark-ups.

Attack wishy-washy language

"ISO will be charged processor's costs associated with any government or payment network associated compliance requirements." This is the kind of language ISOs have to attack without mercy. The language purports to simply pass through to the ISO the processor's "costs" associated with new government or payment network compliance needs.

To a fair-minded, naïve ISO, this looks harmless and fair. To the not-so-naïve processor, this language means it can charge the ISO not only its third-party costs but also internal (potentially substantial and arbitrary) costs associated with any new government or payment network rule. ISOs need to see this language for what it is and demand changes.

Do not accept language that will allow processors to arbitrarily change fees for no logical reason or no connection to their true costs. If processors are allowed to arbitrarily change pricing, what's the point of negotiating an ISO agreement in the first place?

Learn from history: PCI

When Payment Card Industry (PCI) Data Security Standard (DSS) compliance became a requirement, some processors invented new PCI fees for merchants and ISOs. Some such fees were to help merchants become compliant; others were to profit from merchant noncompliance.

The point in this PCI saga is that a lot of the costs charged to ISOs and merchants bore no connection to the processors' actual costs. This kind of potentially arbitrary disconnect between processor costs and pricing to ISOs gives rise to rage on the part of ISOs.

Trust a processor as much as it trusts you

When confronted with the arbitrary nature of ISO agreement wording that allows the processor to invent new costs associated with a new rule or law, two answers from processors are common:

  1. We can't predict what our costs will be: Fair enough – new laws could become enacted that could result in increased costs for processors. Such costs, however, are quantifiable. Even if they include mandated programming costs, they are all still quantifiable. Therefore, despite what they may say, processors are able to quantify their own costs associated with changes in laws and rules.

    Once those costs are objectively defined, ISOs can insulate themselves from gouging by processors. Unforeseen costs are nothing new to the acquiring industry. Therefore, ISO agreements should accommodate them – while giving ISOs the ability to block processors piling on additional profit-taking.
  2. We would never be unreasonable: If only this were true. One program manager at a processor may see the wisdom of honoring promises and respecting ISOs, but what if that person leaves? What if the processor decides it doesn't want to be reasonable? What if management decides an exorbitant fee tacked on top of a compliance offering is reasonable, when it is not? When these things happen, ISOs are in for shocks and disappointment.

    The solution is for ISOs to trust in their processors and the business representatives of those processors while also putting even more trust in the wording of their ISO agreements. This is because, ultimately, the wording of the ISO agreement will out last any individual representing the processor.

I have seen too many instances of well-meaning ISOs entering into agreements with processors that were represented by honest, well-meaning individuals who were subsequently replaced by new representatives who either did not know about prior promises made to the ISOs or simply chose not to honor them.

As a trusting person by nature, it's been difficult for me to see processors go back on their word or take excessively aggressive interpretations of ISO agreements. I hope readers will learn from my experience and avoid putting excessive trust in their processors when it comes to fees associated with new laws or rules.

Online sales tax: The elephant in the room

I expect that Congress will enact some version of the Marketplace Internet Tax Fairness Act (MITFA) soon. When this becomes law, online merchants will have to collect state sales tax in the states where purchasers are located. If they don't, they will go to jail.

The MITFA will make PCI look like a Sunday school picnic, because ISOs will be calling merchants and striking fear into their hearts by asking if their current processors are helping them comply with MITFA. You can imagine the rest. Processors and ISOs have had fair notice of this impending law for a couple years. (I wrote about this in "The MFA: What payment pros must know in 2014," The Green Sheet, Feb. 10, 2014, issue 14:02:01.)

So what happens when an ISO asks a processor to put language on this topic in an ISO agreement? A lot of mumbling and fumbling and talk about how uncertain the situation is and that the processor cannot predict its costs. This is the kind of issue for which ISOs could negotiate with processors to make unapproved mark-ups a violation of the contract. For example, the agreement could state: Processor's actual and documented third-party costs associated with MITFA compliance can be passed through to merchants without mark-up other than as approved by ISO.

ISOs need to seize on and eliminate language that opens the door to arbitrary new fees. We are all experienced enough to be able to work around, as former U.S. Defense Secretary Donald Rumsfeld used to say, the "unknown unknowns" and "known unknowns."

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 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 atlas@adamatlas.com or call him at 514-842-0886.

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.

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