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The Green Sheet Online Edition

August 10, 2009 • Issue 09:08:01

Legal ease
Seven reasons to avoid exclusivity

By Adam Atlas
Attorney at Law

Exclusivity means you can't sell bankcard processing and value-added services for anyone other than the party with whom you have signed a contract. Whether you are a processor, ISO or merchant level salesperson (MLS), an exclusive relationship is often a recipe for stress - or worse - somewhere down the line.

The purpose of this article is to summarize some of the reasons to avoid getting into exclusive relationships in the payments industry.

1. One size does not fit all

No matter which processor you select, it will not be able to take the full variety of merchants you are likely to have in your portfolio. Therefore, every sales organization necessarily needs a secondary or tertiary provider to board merchants who are not acceptable to an agent's or ISO's primary processor.

Not being able to sign a merchant with whom you have already established a relationship is frustrating and tantamount to leaving money on the table. You should build into all of their agreements enough flexibility to have at least one or two other places to board business that cannot be placed with your primary provider. This applies to all ISOs and MLSs.

2. Exclusivity as tight rope

ISOs are often confronted with a long list of scenarios which will lead to default under their processing agreements. When they enter into exclusive ISO-processor relationships, the variety of ways ISOs can default increases because of the severe constraints and limitations that exclusive contracts place on their activities.

As for MLSs in relationships with ISOs that are less than friendly, exclusive relationships create opportunities for ISOs to terminate agents for the slightest slip-ups, such as finding another place to board a merchant who was rejected by the ISO. Neither party benefits from this level of insecurity. In the long run, the stress placed on business relationships by exclusive arrangements subverts the interests of both parties.

3. Exclusivity may be illegal

In some states, such as California, the law may render unenforceable exclusivity clauses in sales agency relationships. Both parties may be setting themselves up for disappointment in jurisdictions where exclusivity is not supported by the courts.

ISOs will be disappointed because the contract will not be legal as far as exclusivity is concerned. And MLSs will be disillusioned because they will have given up opportunities to place business elsewhere because of the exclusive relationships they thought they were obligated to follow.

Before entering into any such relationship, review the applicable law in your jurisdiction to see whether exclusivity is even permissible.

4. Building on the negative

Having advised hundreds of ISOs over the past few years, I have observed that the most successful ones build on strengths and business incentives rather than on restrictions and restraints.

If MLSs or ISOs are given flexibility to sell competitive products at competitive prices, they will more likely be provided with suitable residuals; consequently, they will be more motivated to continue to sell than if they are told to sell a single product at a single price.

An ISO's business culture built by individuals attracted to the payments industry for sound business reasons is likely more inherently positive than the culture of an organization built on legal restraints and parameters. Requiring exclusivity from the get-go also informs the person bound by that exclusivity as to the nature of the organization requiring it.

MLSs will inevitably learn about the myriad possible relationships and layers of involvement in this industry. In my experience, exclusivity stifles the development of effective sales organizations.

5. Pricing, a bind for all

No matter how well-priced the exclusive relationship is, it will never be able to fulfill all the needs of an MLS, who will inevitably find a variety of merchants needing a range of pricing models that cannot all be satisfied by a single provider.

Having only a single pricing grid with which to work, agents will become frustrated and seek to either renegotiate their exclusive relationships or breach them. Businesses requiring exclusivity may also be uncomfortable taking all the merchants sent to them.

Being on the receiving end of exclusivity may increase your triage burden when receiving applications. Agents with a variety of relationships will - for their our own best interests - send merchants to where they best belong.

6. Train wreck exit

Very few buyers would be willing to buy an exclusive relationship. As such, from the agent's perspective, exclusivity has the effect of dampening the interest of potential portfolio buyers. Some MLSs will be selling only the residual stream instead of the whole relationship.

However, a question will arise as to whether the purchaser of the residual stream will be tied into some kind of exclusivity with the organization paying the residuals. Agents in exclusive relationships also have difficulty transitioning to other relationships.

Businesses requiring exclusivity often find it difficult to let their agents go. That creates tension when relationships end, which results in either one or both parties being very disappointed.

7. Non-circumvent

Another clause that often appears in contracts governing exclusive agent relationships is the non-circumvent clause. This is an obligation on the part of agents to not enter into relationships with the banks that sponsor their ISOs. It is an indirect way of telling MLSs they must not graduate to a direct relationship with ISOs' sponsoring banks.

While this will work for some agents some of the time, it will not work for most agents most of the time. The kind of agents that ISOs want to employ are those who are ambitious, entrepreneurial and energetic. Those agents will quickly understand the import of the non-circumvent clause.

As an alternative, ISOs can provide the opportunity for their MLSs to register as sub-ISOs with their respective acquiring banks and continue their mutually beneficial relationships rather than try to stymie the agents' revenue growth.

Sometimes exclusivity is a great idea

Exclusivity isn't bad all the time. Sometimes pricing, buyout commitments, portability, rights for MLSs or access to support systems will be sufficient consideration to fully justify exclusivity. Some ISOs and agents are also dedicated to specific kinds of markets or merchants and do not need the variety required by general sales offices. The added pricing benefits of exclusivity may therefore be helpful to those kinds of organizations.

Readers should not interpret this critique of exclusivity as necessarily applying to everyone all the time. Some exclusive relationships are immensely profitable and pleasing to everyone involved. However, many exclusive relationships create stress for both parties that ends up inhibiting the prosperity of all concerned. 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, e-mail 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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