By Adam Atlas
Attorney at Law
Have you thought about placing each of your ISO acquiring relationships in a separate company? If you are a merchant level salesperson (MLS) working with a number of ISOs, the case for separate incorporations is not as strong. If, however, you are an ISO registered with more than one acquiring organization, the arguments are more compelling.
Following are six reasons why you should put each registration in a separate corporate entity.
Suppose Company A has two ISO deals, one with Processor A and one with Processor B. If the Processor A relationship results in a $500,000 liability to the ISO, Company A's relationship with Processor B will likely suffer, if only because revenues from that relationship may be soaked up by Company A's liabilities under its relationship with Processor A.
An ISO should never allow one processor relationship to interfere with other processor deals. Placing each processor deal with a separate company provides the ISO protection for each relationship from the potential liabilities of the other processor relationships.
Processors usually want to be informed of other processor relationships an ISO may have, whether they be direct or indirect.
Divulging that information may, however, have the down side of the processor wanting to seek guarantees from the other businesses for the ISO's obligations to said processor. However, such guarantees are not always required and will ultimately be a matter of negotiation with the processor requesting them.
The ability to create a kind of silo for each processor relationship is the strongest rationale for having each processor relationship in a separate company. All of the other arguments I present herein are of lesser importance.
If an ISO sells for Processor A and Processor B, moments of confusion over branding, customer service and marketing will inevitably arise. This can lead the ISO to inadvertently breach card company rules and incur considerable fines.
For example, if MLSs fail to properly identify themselves with the name of the registered entity for which they are selling, they can incur fines of $50,000. Placing each ISO relationship in a separate company will lessen the likelihood of this happening in two ways:
Even if you decide to have all your processor relationships in one company, it is a good idea to have agents isolated within each of your processor sales channels. For example, an ISO that has relationships with Processor A and Processor B may have five MLSs selling in each processor channel, but none of them selling for both Processor A and Processor B.
Keeping MLSs in dedicated sales channels will considerably decrease the chances of branding rule violations. For agents, selling merchant accounts involves significant back-and-forth communication with both merchants and acquiring banks. It is always helpful to decrease the opportunities for errors in those exchanges.
Each processor has its own way of calculating residuals. I am not an expert in accounting, but I think it is easier for a company to deal with a single set of residual reports, agent reports and agent payments than it is to handle diverse sets of such reports.
It is also easier to determine the profitability of a given processor relationship, as compared with other processor relationships, if it is isolated within its own corporate entity with dedicated costs and expenses.
In addition, when your ISO relationships are each in different companies, you may be able to set up intercompany loans whereby the more profitable relationships are able to help finance the less profitable ones.
Having worked for many MLSs over the years, I have learned that they crave stability. An ISO that has a single brand, with a single and reliable compensation package, I think, will be more appealing to MLSs than an organization that requires agents to constantly figure out which channel is most profitable, thereby distracting them from their primary objective: to close new merchant accounts.
When it comes to portfolio sales, a buyer may be interested in purchasing not just a residual stream or a merchant portfolio, but also an entire company if it is exclusively dedicated to the residual stream or portfolio in question.
If your ISO relationships are segregated into distinct companies and a purchaser doesn't want to purchase your whole merchant portfolio, you may be able to sell one company to the buyer and retain the remainder of the portfolio in your other company.
This would avoid the complicated division and assignment of relationships from an ISO doing business with more than one processor. On the other hand, if a buyer wants to purchase all of your processor relationships, it is not much more difficult to sell them out of multiple companies than it is to sell them from one individual company.
Sometimes, a processor relationship goes sour, and if other processing relationships are handled by the same entity, the ISO owner may risk losing an entire portfolio developed over years with multiple partners.
When each processor relationship is isolated within a separate company, the owner has flexibility to wind down any individual processor relationship and cause only minimal interference with other relationships.
All incorporations and accounting matters should be done and planned with the counsel of your local corporate attorney and local accountant. Be sure to seek advice from an accountant who knows your municipal and state tax laws before committing to any particular structure for your ISO business.
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 firstname.lastname@example.org or call him at 514-842-0886
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