By Adam Atlas
Attorney at Law
Having had the privilege of advising ISOs over a number of years, I've been able to observe strategies taken by ISOs facing various legal issues. New clients sometimes ask how my best clients have achieved their aims. In this article, I will focus on a few legal strategies adopted by some of my firm's most successful clients.
Here, the winners find a perfect balance between aggressive and passive actions. When, objectively, an ISO has been wronged, such as an agent's unambiguous, wrongful and substantial solicitation of its merchants, and the ISO is likely to recover something from the agent, then winning ISOs have taken aggressive positions.
Being aggressive in this context means reviewing the terms of the applicable agent agreement and enforcing them. Such enforcement starts with sending a cease and desist notice, perhaps clawing back payment of residuals, and can rise to taking action before a court or arbitrator to recover losses caused by the agent.
But what about ISOs that are too aggressive? An example would be when a merchant level salesperson (MLS) has a merchant who was entirely displeased with the ISO's service, the services of the ISO are not compatible with the needs of the merchant, the merchant has complained to the ISO about the situation, and the agent has also advocated for better service for the merchant from the ISO – but the ISO has not delivered. Let's imagine the merchant gives the MLS an ultimatum: either find me another processing home, or I'll go elsewhere. This would be to the loss of both ISO and agent. Imagine the MLS makes a final attempt to inspire the ISO to serve the merchant properly, to no avail. The agent then takes the merchant elsewhere – in technical violation of the merchant agreement.
Imagine the ISO takes the same action against this agent as it did against the MLS in the earlier example, in which the agent, in bad faith, moved a substantial quantity of merchants in blatant violation of their agreement – with no excuses. In the second case, the ISO may, technically, be able to get away with claiming damages against the good faith, well-meaning agent, but remember, the merchant is gone, and this is a collection mission that is unlikely to generate any real benefit for the ISO.
What's more, other agents observing the ISO's aggressive stance will be put off and less motivated to board new merchants or work with the ISO to solve issues pertaining to merchants needing better service. In short, this aggressive position by the ISO may do more harm to its business than one that is more flexible and understanding of the merchant's real needs.
Then, there are the cases of extreme aggression. Here, an ISO pursues an MLS who has committed a minor technical infraction and has no assets. The aggressive ISO often cites this type of wasteful claim as being necessary to prove a point or make an example of the agent. More often than not, this kind of aggression injects fear into the ISO's relationships with other MLSs – fear that could poison the long-term mutual trust required to build the best business relationships.
Note that very aggressive ISOs spend a significant amount of money on lawyers, so I suppose there could be a silver lining for me in cases involving aggressive ISOs (just kidding). On a serious note, my team does not support any party in futile or excessively aggressive claims, as we do not believe that to be a good use of client money or the time of our lawyers.
As readers will know, the two most common ways to engage agents are as employees (for which a W-2 tax form is filed) or as independent contractors (for which a 1099 form is filed). Key differences exist between these two types of relationships.
In short, employees are obligated to follow ISO instructions that set the parameters of their work tasks, productivity, schedule, etc., and are entitled to employer and government benefits, such as minimum wage, that go along with being an employee. Independent contractors do not enjoy the benefits of employment but have the potential to be the masters of their own destiny, setting their own schedules and soliciting merchants how and where they wish, etc.
Sometimes an ISO signs MLSs using paperwork that reflects independent contractor status, but the agents may actually be employees in the eyes of the law, based on criteria set forth by the IRS. An explanation of these criteria is available at www.irs.gov/newsroom/understanding-employee-vs-contractor-designation. This mistake is common among ISOs. It's best to get the designation correct from the start to avoid difficulties later.
I've found that the largest, most successful ISOs have consistently built sales forces comprised of employees, not independent contractors. Employees can be controlled more effectively; more closely monitored; more easily trained within a captive workplace environment; and more easily motivated by factors other than raw compensation, including perks like titles, office accommodations, office culture, etc.
Regular readers of The Green Sheet will know I do not use this column to plug lawyers or legal services. But I must say that I rarely see a non-lawyer-written agreement serve the intended purposes of the ISO that created it. Some ISOs believe they've either been around long enough to write their own agreements, or they haven't been around for long, but have great templates.
In both cases, the ISO may wish to start from a preferred document, but should engage an experienced fintech lawyer to check their work. Subtle issues, for example, survival clauses and language being binding on affiliates, benefit from fine-tuning that is well worth the expense of a lawyer.
In the long-term, the legal strategy of an ISO becomes a further embodiment of the ISO's culture. So pick a culture you like, as it will permeate throughout your business in all of its ups and downs.
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 by email at firstname.lastname@example.org or by phone at 514-842-0886.
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