The Green Sheet Online Edition
January 14, 2008 • Issue 08:01:01
Drill down to the fine print
Contractual agreements between independent merchant level salespeople (MLSs) and their ISO partners are the foundation of healthy and profitable relationships. I'm sure you, as ISOs and MLSs, have found great partners who communicate clearly and are honest and transparent in their business dealings.
On the other hand, you may have been excited about potential partners who turned out to be too good to be true.
I am not an attorney, but in my 20-plus years in this business I have seen relationships fail when MLSs don't carefully review and consider the fundamental business terms of their contracts. The first step to understanding the implications of an agreement is understanding which terms impact the business relationship being defined by the agreement.
I've outlined a few basic concepts that bear particular attention. They are key elements of any agreement and should be reviewed carefully. Also, prior to review, it is critical to identify all schedules or exhibits referenced in the contract.
All contracts reference specific performance expectations for each party. One example is service minimum. While the definition of minimums can vary by contract, specific instances may include minimum monthly merchant applications or minimum residual earning before payout.
If you are not clear about how minimums relate to your contract, you and your partner may start out the relationship with different expectations.
Right to own
Vesting rights most often refer to the ownership of the residuals earned from merchants signed during the agreement term. They also can outline what could happen should the contract terminate prior to full vesting.
Vesting usually occurs at certain milestones in the relationship, or a specific time period. In the latter, it is likely there is no ownership - or full vesting - until that period has elapsed.
If the agreement is terminated, vesting issues may result in the cessation of residual payments.
There are always issues and clauses that should remain exclusive between partners. However, in your contract definition, exclusivity may mean MLSs are bound to sell only the services provided by their partners.
MLSs should have clarity about exclusivity if this clause is presented in a contract. An unclear understanding could rock an agreement's foundation.
The fix is in
In most cases, buy rate and rate minimums refer to fixed costs that must be charged to the merchant before any revenue is generated for either MLSs or their partners.
Buy rate and rate minimums could be identified as monthly minimum fees, minimum mid-qualified and nonqualified surcharges, annual fees, or other itemized merchant related charges.
Diagrams, charts welcome
Revenue share percentages may include escalation opportunities based on many factors. They may also exclude certain revenue earned. If this is confusing, ask for clarification before you agree to the contract. Request that this be put in chart or diagram form if necessary.
If it isn't clear what your costs are, then you can't effectively price a merchant.
Things that make you go hmm
Consider these contractual clauses carefully and ask questions.
- What is the time period before minimums apply?
- What happens if production drops below the minimum?
- Does the failure to reach a minimum impact any other provision of the agreement?
- Can a single instance where the minimum is not reached result in termination of the agreement?
If you are still confused after receiving an explanation, there is no harm in asking for further clarification or even requesting that a provision be removed. Remember, there is no such thing as a stupid question - especially when it involves your profession and your ability to service your customers.
Contracts between MLSs and their partners should establish ground rules that define the road map of success. It is up to MLSs to make smart decisions by aligning their businesses with strong partners known for integrity. Then MLSs can focus on delivering the best merchant processing products and services that offer their customers a real value proposition.
Jeff Fortney is Director of Business Development with Clearent LLC. He has more than 12 years experience in the payments industry. Contact him at firstname.lastname@example.org or 972-618-7340.
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