The Green Sheet Online Edition
December 27, 2010 • Issue 10:12:02
Paperless merchant acquiring: A legal perspective
We've been talking about it for years: going paperless in merchant acquiring. If you can buy a house on eBay without paper, why can't you get a merchant account without paper? The answer is that we, as an industry, have not worked out the logic of paperless applications and merchant agreements. The purpose of this article is to provide certain legal perspectives on making a merchant acquiring business paperless.
Is it legal?
Yes. Pursuant to the Federal Electronic Signatures in Global and National Commerce Act, also known as E-Sign, a "signature, contract or other record relating to such transaction may not be denied legal effect, validity or enforceability solely because it is in electronic form." This federal law applies, with certain exceptions, and may have been embellished upon by certain state laws.
The principle that electronic agreements have the same effect as written agreements is generally accepted in U.S. law. The existence of this legal principle does not, however, imply that all banks are ready to roll out online merchant account applications. Instead, it means that if they wanted to, there would not be much of a legal impediment.
Has anyone done it?
Yes. I have had the pleasure of advising some of the leaders in our industry in drafting and providing the legal framework for online electronic merchant applications and agreements. The banks that have ventured into this territory tend to be skittish about it. I think this is because online applications and agreements are a bit of a paradigm shift for banks.
Some banks, for example, will shift the burden of legal enforceability of their online agreements to the ISOs that wish to use them. That means ISOs have to guarantee to the banks that if merchant agreements fail because they are electronic and not on paper, the banks can sue the ISOs for the agreements' lack of enforceability.
Is it a pre-application, application or agreement?
When discussing electronic merchant account sign-ups, it's important to distinguish between pre-applications, applications and agreements. These terms are not necessarily industry-defined, but with some explanation, you will see how they differ. A pre-application is a type of inquiry form that you are likely to see on many ISO web pages. It serves, essentially, to pick up leads from the Internet.
An application is a form in which merchants provide more detailed information concerning their business operations and where pricing is set out. A merchant agreement details everything one would find in an application together with the terms and conditions applicable to the acquiring bank's merchant services.
When establishing an online merchant sign-up process, ISOs should be very clear with themselves and with merchants as to exactly what they are trying to accomplish at each stage of the process.
What about tailoring pricing to the merchant?
Most online agreements will allow ISO representatives to tweak certain variable fields so as to continue to permit the customary give and take between merchants and acquirers that is integral to the sales process. Training will be required of ISOs and agents to understand what prices can be changed and how to change them.
Several ways exist to handle the electronic sign-up process to accommodate the needs of ISOs, agents and merchants. One is to create a login application via which an agent and merchant can access an application together, perhaps on a laptop at the merchant location.
The merchant or the agent could then make subsequent adjustments to it, with the merchant having the final right to accept it, thereby creating a permanent record of their agreement.
Does an electronic signature require specific technology?
No. Something as simple as the merchant expressly agreeing to a defined set of terms and pricing, and indicating such on a dedicated website, will often be enough to secure legal agreement on the document.
Note that E-Sign and other similar laws contain specific requirements for an agreement to be effective, so review of your paperless sign-up process by an attorney is recommended. That said, it will probably cost the average ISO less to use paperless sign-ups than the current cost of printing many copies of lengthy agreements and applications.
What form does the 'signed' agreement take?
As a matter of law, an agreement signed in electronic format must be recorded as such so the parties can retrieve it at a later date. The "recording" of the signature becomes an "electronic record" of the agreement, and that is the form the agreement takes in the archives of the parties concerned. We have all signed up for various online services, such as LinkedIn or Facebook. That kind of sign-up process, together with disclosure that is required for our industry, is the essence of a paperless merchant sign-up.
Are paper copies still required?
No. So long as an electronic record of the agreement is accessible by all parties thereto and contains all the terms and conditions of the agreement, there is no specific legal requirement, under federal law, to create or retain a paper copy. There may be business or marketing reasons to create a paper copy and deliver it to the merchant; there may also be bank requirements or card company rules that require it, but the law alone does not.
When creating a paperless sign-up process, ISOs and processors must reflect on how documents will be accessed years into the future. Could you open a document from 1998? That's the kind of question you have to ask yourself when you make a document in 2010 that will need to be accessible in 2020 or later.
What do the banks get?
Whatever they want. Banks already employ a wide variety of practices for keeping records of merchant agreements. Some will allow ISOs to board merchants by entering data into the bank system and permit ISOs to retain paper copies of agreements. Some banks will accept scans of original documents; others want the originals.
Paperless agreements are much easier to manipulate than paper agreements, so they will simplify the process of record keeping. That said, data storage is an issue, and banks may not want to store all the data concerning every agreement on their own systems. The issue of what banks get in a paperless application process is one to be settled by an arrangement with the bank.
Ultimately, banks must be able to access electronic records of merchant agreements regardless of where the records are kept. When merchants cause losses, as they often do, banks need to sue, and they need to have something to show the court that hears the claim.
Is paperless the way to go?
In theory, going paperless in the payments industry is easy. In practice, there are several moving parts, including the merchant agreement; the lease; and automated clearing house, check, gift-card and other ancillary agreements that all need to be rolled into a paperless application. This takes flexibility on the part of suppliers and coordination of each party's legal requirements. We'll all be there sooner or later, I hope.
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 email@example.com or call him at 514-842-0886.
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