By Adam Atlas
Attorney at Law
As ISOs and merchant level salespeople, when you explore processing deals, the documents presented to you will vary. It takes hours to thoroughly review a processing agreement. However, it is possible to tell within five minutes if red flags indicate a deal is unattractive.
This article contains a handful of clauses and processor negotiation tactics that should put you on notice of a potentially bad deal.
The best agreements are based on mutual trust and a mutual business attraction. The worst are those in which you become entrapped in rigid, legally binding relationships that do not give you a fair share of benefits.
If a processor drafts an agreement containing any of the following clauses or uses the tactics described herein, think hard about whether that company is the place to put your business.
You might see language in an agreement that says something like this: "Processor shall have the right to change any fees or charges on Schedule A on notice to ISO unless such changes are a result of pass-through costs, in which case no notice to ISO will be required."
The meaning of the language is basically that the processor can rewrite your pricing grid without your consent.
For example, if you cannot terminate the agreement without penalty following a unilateral processor price hike, you are being invited to sign an agreement over which you have, effectively, no control. It's an invitation to a raw deal.
Be careful of statements like this because they beg the question of whether the processor wants to sign you for sound business reasons (the best set of reasons to work together) or merely to lock you into a fixed-term agreement (a less attractive reason to be bound to a processor).
All ISOs live in fear of card Association fines, which can easily be $50,000 and more. (The marked absence of procedural justice in adjudicating fines makes me wonder if there is a hammer and sickle hidden somewhere in the branding of card Associations, but I digress.)
In the scary realm of card Association fines, some processors have seen fit to actually tack on a premium to the fines. Premiums can reach as high as a punishing 10%.
Under these terms, if you breached a rule and were subject to a card Association fine of $50,000, the processor would collect an additional $5,000 from you, as if the $50,000 were not enough to teach you a lesson.
If you see a punitive processor assessment on card Association fines in your ISO agreement, ask the processor why it wants to make your grief a profit center.
Some ISO agreements would actually oblige you to disclose to the processor the pricing for your equipment leases and other suppliers.
First, this kind of clause effectively obligates you to breach your lease and other supplier agreements. That is reason enough to be suspicious.
Second, this clause puts you in the position of revealing confidential, proprietary pricing information.
A processor that collects all its ISOs' third-party pricing information may use it to favor one ISO over another in terms of lead referrals.
It may also use the information to research acquisitions of lease companies or for other purposes that have no obvious benefit to you.
Pricing is a private matter between you and your merchants. No processor should be leaning over your shoulder. Those that meddle in your business affairs are interfering with your customer relationships and could be seeking unethical profits from your client base.
When a processor tells you that its company policy is not to indemnify ISOs, it is really telling you that its company policy is not to remedy the wrongs it may cause.
So, next time you hear that line from a processor, remember that there are other processors competing for your business that would be only too pleased to negotiate a fair agreement with you.
If a processor discourages you from having your ISO agreement reviewed by a lawyer or takes a take-it-or-leave-it approach to negotiations, the processor is sending a message to you.
Some processors are large organizations, and they would much prefer that each ISO sign exactly the same deal so that they don't have to bother with some ISOs having rights that others do not. Don't accept this.
An ISO deal is not a summer job at your local fast food outlet. It's a serious business undertaking that entitles you to a full and fair negotiation of all the terms of your relationship with the processor.
If a processor treats your deal as a take-it-or-leave-it proposition on day one, imagine how it will treat you when something goes wrong. Pause to reflect on the nature of the processing organization you are planning to work with.
The approach taken by a company's legal department says a lot about the organization's motives. If its legal counsel is flippant, arrogant or unnecessarily domineering, that is an indicator of the company's culture.
Some lawyers will reject your proposals just because they can. Thus, they ignore the vital business interests at stake in every ISO negotiation.
Other lawyers agree to something by telephone. Then they send a document that does not reflect the agreed-upon terms.
Before signing your ISO deal, get a good feel for whether you are working with deal makers or deal busters. Two minutes on the phone with a processor's lawyer will give you the answer.
If the difference between the agreement initially presented to you and the final document is like the difference between an online mortgage broker and a brick-and-mortar book shop, you know something is not right.
Processors should present you with a deal that is easy to understand and does not require a $6-million-man type of re-engineering to be acceptable.
Most ISO agreements are signed without any negotiation on the document's wording. That is unfortunate because many of those contracts contain the clauses and issues I've just outlined.
Remember, if a processor is unwilling to negotiate with you on the first day of your relationship, can you really expect it to negotiate when there is an issue to resolve?
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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