With the steady influx of regulatory, legal and technology influences redefining how we transact business, analysts project that over the next five years, revenues from payment processing will post modest annual gains of 2 to 3 percent. At the same time, more than $1.5 billion in revenue will be up for grabs for software innovation rather than traditional POS terminals, according to research firm McKinsey & Co.
Strategies undertaken today could be the best assurance of profitability in the foreseeable future. To address potential stress points, experts from the legal and business side of payments shared insights with The Green Sheet on how to weather the storm – from managing talent and contracts to preventing Federal Communications Commission red flags and margin compression from taking its toll on business.
Rogue elements, whether operating internally or externally, can quickly capsize an organization if left unchecked. The dual role ISOs play in managing both employees and independent contractors places inordinate pressure on hiring and retention of talent. Not only is the upfront investment to acquire top talent critical, deploying best practices for the duration of the relationship may impact ISOs long after individuals move on.
Robert Bekken, a human resources lawyer for the past 38 years who serves as General Counsel and Director of Business Development and Charitable Giving for Los Alamitos, Calif.-based ISO Serve First Solutions Inc., is a firm believer in hiring with eyes wide open.
"You're hiring someone; it's an important decision," he said. "You're letting them inside your business, and it's much more than a first date. Find out who they are and do the prudent thing to make sure you're hiring the right person." For starters, he recommends having each person complete an employment or independent contractor background application, followed by criminal background, DMV and personal reference checks, and pre-employment drug screening.
"Once they're hired, I like to have a set of clear documents, that always end up in a lawsuit, that you've given them," Bekken said. "I like to have a separate sexual harassment policy. Under California law, if you have one employee, you could be accused of sexual harassment. If you retain an employee that's engaged in sexual harassment, that's negligent retention." The longer the retention the greater the potential liability, even with independent contractors, he added.
Laws applicable to employees typically apply to independent contractors, one key difference being that ISOs cannot directly control what independent agents do on a daily basis. Bekken said this is where ISOs tend to get into trouble because when agents violate laws during the regular course of business, the legal system will often scrutinize the entity contracting with them.
Other recommended documents that employees and agents should sign include a 90-day trial period policy, a statement governing use of company computers, a drug and alcohol policy, an at-will arbitration agreement and a company handbook.
"I'm big on arbitration," Bekken said. "It's quicker for both the employee and the company. You have a judge deciding the cases as opposed to a jury. You're not spending two or three years with the thing, so you can go on with your life." In his experience, about 80 percent of the arbitration cases are won by the employer.
The at-will clause means an ISO can fire an individual or terminate his or her contract for any reason with or without cause, and with or without notice. However, public policy exceptions do apply, and they include discrimination and wage and hour laws, among others. According to Bekken, once an ISO has five or more employees, in most states, the various discrimination laws take precedence.
Failure to release individuals in a timely manner can be problematic for ISOs. "The bottom line is there is a business necessity rule that says the business has the right to make business decisions as long as that decision is not based on some illegal basis," Bekken noted. "If there is a customer complaint, get [the offending employee or contractor] out of there. That's a perfect business justification rule."
After terminating an employee or contractor who represents a potential danger to someone, giving a positive reference could expose the ISO to lawsuits. "There's a recognized privilege in the laws in every state that, as long as you're not defaming them, it's a qualified privilege. You can give information." For clients in doubt as to how to respond to reference inquiries in this type of situation, he advises them to say, "They're not eligible for rehire under any circumstance."
Based on his experience as a payments attorney, Michael Brewer said issues concerning restrictive covenants in contracts play prominently in lawsuits. The allure of competitive pricing structures entices agents to switch alliances, but when they do switch, the original ISO has a vested interest in protecting its merchant portfolio.
Non-solicit and non-compete provisions often serve as the first line of defense for ISOs. Although designed to prevent agents from soliciting existing merchants or contracting with direct competitors for a specified time and territory, they sometimes lack legal footing. Brewer gave as an example a case in California in which the court held that the non-solicitation provision in the ISO agreement was not enforceable.
"The typical non-compete statute in any state, and in particular California, usually only relates to the sale of the business," he said, whether a shareholder, partner or sole proprietor sells a partial stake in or the entire business. "In those situations where there is actually a sale of an interest in a business, the non-compete can be used as long as they are reasonably restrictive, both in terms of geography, as well as in terms of time, to prevent someone from competing."
Provisions that extend five to seven years typically are not enforceable. On the other hand, if they protect confidential or trade secrets of an ISO, those generally are enforceable as long as they are specifically narrow in terms of the amount of time under which the agent will be operating under the provision, as well as the geography, Brewer said.
Drawing the line on non-solicitation can be a delicate matter. "A non-solicitation provision prevents an overt attempt to induce a merchant to come do business with the agent with some other processor," Brewer said. "It does not prevent a merchant who is perhaps disgruntled with the existing ISO from leaving and going to the agent who may have a non-solicitation provision and asking the agent if the agent has another processing solution for that particular merchant."
Under that circumstance, the agent would not be in violation of the non-solicitation provision because the merchant initiated contact. However, if the agent initiates contact with merchants affiliated with a previous ISO, the provision should prohibit them from saying anything other than "they're gone as of this date and they're going somewhere else, but that's it," Brewer said.
Another area where ISOs can exert contractual clout is by tying post-termination residuals to restrictive covenants. In effect, the contract would state that the agent will continue to receive post-termination residuals as long as the agent honors the restrictive covenants and other provisions in the agreement, because there are costs associated with retaining merchants and paying residuals.
In states that honor it, a severance provision should be included in ISO agreements. With this provision, if a court finds any provision in the agreement to be void or in violation of the state law where the matter is being heard, the court is permitted to sever the clause and still give force and effect to the remainder of the agreement, Brewer stated.
As laws continue to evolve and change, it's essential that ISOs reevaluate existing agreements periodically to address any compliance and other issues that might surface. Brewer advises clients to review their contracts every 12 to 24 months, as well as have employees and agents then sign an addendum, which becomes part of the agreement.
Many ISOs deploy some form of auto-dialer phone system to solicit current and prospective merchant customers. But during the past year, federal and state regulators have begun to crack down on business-to-business (B2B) telemarketers, with stiff penalties for violators.
On Oct. 16, 2013, revisions to the FCC Telephone Consumer Protection Act (TCPA) went into effect. Under the original law passed in 1991, individuals could file lawsuits and collect damages for receiving unsolicited telemarketing calls, faxes, and prerecorded or autodialed calls.
But under the new rules, telemarketers are now required to obtain prior written consent before autodialing or sending a pre-recorded or text message. Manually dialed calls without pre-recorded messages are exempt from this rule. The new rules also stipulate that having an established business relationship no longer relieves telemarketers of "prior unambiguous written consent requirements," and this applies to cell phone numbers.
"B2B historically has had less risk because most regulators are concerned about protecting consumers, and most people who file the lawsuits are filing them for consumers," said Eric Allen of Allen Legal Services PLLC, whose Utah-based law firm specializes in telemarketing compliance. "But that's starting to change now with these new rules that apply even to B2B."
He pointed out that in the state of Washington, where auto-dialer rules also apply to business landlines, class-action lawsuits against telemarketers have proliferated. Nationally, these lawsuits have picked up steam as well. "There were more TCPA cases filed in the last year than in any other year in history, and they're still on the rise," Allen said. He also noted that ISOs are now being targeted, and it's difficult to find insurance that will cover telemarketing claims.
Also, call abandonment restrictions now apply to telemarketers who use predictive dialing. "The new rules state that on predictive campaigns where you're constantly dialing more numbers than you have live agents, and it drops that call, you cannot drop or abandon more than 3 percent of all dialed calls," Allen said.
Getting written business consent for telemarketing calls is no easy task. To help ISOs comply with the new TCPA rules, Allen collaborated with Customer Bringer CEO Gordon Rose to develop CB Scrubber, which removes cell phone numbers from phone lists before call campaigns are executed. Rose said his company licenses national cell phone data, which is then aggregated into the service and updated daily.
"If a client comes to us and says, 'OK, I have 100,000 leads I'm going to call,' they can send them to our service department, and within 10 minutes or less, they get the file back with all the cell phones removed, so they can take that file and put it in their auto-dialer and be compliant," Rose said.
CB Scrubber also provides a time date stamp receipt and compliance manual inserts to document each step in the removal process, which is important because the law requires that cell phone numbers be scrubbed every two weeks. With proper documentation, an ISO that inadvertently calls a cell phone number that hasn't been scrubbed from a list can be granted safe harbor, provided all rules governing telemarketing have been met.
Right now, the Federal Trade Commission is reviewing public comment on its Telemarketing Sales Rule (TSR), a law enacted in 1995, which generally applies to outbound calls from telemarketers to consumers and requires certain disclosures during phone calls. Whether the FTC will follow suit with stricter TSR guidelines for B2B callers remains to be seen.
While margin compression continues to be a concern to many, new models are emerging that could change that, including subscription-based, value-added online services and models offering greater transparency to merchants and consumers.
One thing that came to light in the settlement of the class action brought against Visa Inc. and MasterCard Worldwide by a group of retailers (currently under appeal) is that surcharging is now a viable option for retailers in 41 states, counting New York, which recently decreed its "no surcharge law" unconstitutional, a ruling that is now in the Second Circuit Court of Appeals.
H. Laddie Mongatgue Jr., President and shareholder of the firm Berger & Montague P.C., one of three firms serving as lead counsel in the Visa and MasterCard settlement case, said, "The idea of surcharging is to allow merchants to charge those customers who actually cause the cost of the fee to be incurred to pay for it, not to have other consumers who pay by cash, check or debit card, which have a much lower fee, to be charged for that cost that's incurred by others."
But to create such a program, merchants must adhere to surcharge cap regulations and provide customer disclosure, among other things. To simplify the matter, CardCharge created a patent-pending system that calculates or "preprocesses" what the total charges will be to merchants – interchange fees, acquirer's fees, processing fees – before a transaction enters the network for the payment type identified. Consumers are able to view the charge and approve it for processing.
CardCharge President Ed Levene said that beyond online and brick-and-mortar merchants, the system can help ISOs expand into regulated industry verticals, such as insurance companies, medical offices and commercial property management, where credit cards often aren't accepted because of the fee structure.
"Many insurance agents don't take credit cards because they actually are an agent for the underwriter," Levene said. "Let's say I sell you a car insurance product. I can't accept your credit card because, theoretically, I'd be netting 2 or 3 percent less than the full fee. I'd have to take a check and transfer it over." With CardCharge, agents can add the cost of card processing to the total amount due.
Another advantage of a program like this is that it can extend credit, particularly in environments where large money transfers occur. For example, a commercial property manager could extend credit to a tenant in good standing who might need more time to pay.
Whatever model you choose, putting these weatherproofing practices to work in your ISO business could make a world of difference. 
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