By Adam Atlas
Attorney at Law
Pricing surprises have become the new normal for ISOs. Payment Card Industry Data Security Standard fees are the thin edge of the wedge upon which some processors have piled on Internal Revenue Service, compliance and new interchange fees that don't fit squarely into existing ISO agreement pricing grids. This article will provide tips for navigating the minefield of ISO pricing in 2012.
Take a moment to put your agreement through its paces on these points:
Consider how each of these changes affects both your revenue and your ability to pass them through to merchants. Don't wait until these increases occur to test the parameters of your agreement; insist on understanding them before they occur. If you are unclear on how any of these play out, address them in writing with your processor so you have a record of its position. If necessary, negotiate and put in place an addendum to provide clarity on these points.
Of course, if third-party pricing really does increase, you should find a way to pass that through to merchants without affecting either your revenue or that of your processor. That said, the competitive nature of the market this year means that any price increase will have a follow-on effect of attrition in the portfolio. ISOs have to proceed with caution while standing up for their rights.
The processor should bear the burden of proving to an ISO why it has the right to increase pricing in a way that reduces the ISO's income. The line is blurring between interchange increases from the payment networks and simple pocketing of more money by the processor.
ISOs should monitor their statements for new fees to the ISO and merchants and see where those fees are being paid. ISOs should question processors on all additions to fees that are not obviously third-party increases. Of course, some legal and regulatory changes may necessitate new systems being built and implemented at the processor level. But higher fees levied on the ISO may exceed the out-of-pocket cost of that system to the processor.
From time to time, processors favor one platform over another. As these shifts are made, some processors require their ISOs to assist them in migrating merchants to new platforms.
But watch out for this "gotcha": in some of these scenarios, ISO revenue on those merchants plummets following the platform migration. While the ISO has spent its own energy migrating merchants - resources it might have spent soliciting new clients - it is rewarded with reduced income. Some ISOs are going bananas over this.
Before becoming the migration-support team for a processor, put on paper the terms by which you will provide this support so as to avoid surprises.
It's hard to sell an IRS fee to a merchant who has no IRS reporting requirement on his or her processing. It should be no less hard to sell that fee to ISOs. Compliance fees, whether negotiated or not, are popping up in ISO agreements or ISO residual reports.
ISOs should monitor their reporting for these fees and figure out where they fit in their agreements. Some ISOs will be surprised to see that their agreements do not permit new fees to be levied willy-nilly; others will find the opposite is true.
It's safe to say that most ISO agreements allow for the pass-through of interchange to ISOs and merchants. But can a processor use a new interchange line-item as an opportunity to piggyback, adding its own additional fee? In other words, if a payment brand charges a new $5-per-month fee, can a processor charge its ISOs $6?
Again, the answer lies in the wording of the applicable ISO agreements. Many do not allow for this kind of taxation of interchange hikes. If they did, there would be nothing stopping the processor from adding $100 to the new fee.
Speak up for yourself. Having advised on hundreds of ISO agreements - at origination, mid-stream, in conflict and at termination - I have learned that ISOs do not get what they don't ask for. Seemingly all-powerful processors are bound by the laws they make for themselves in ISO agreements.
Without being greedy, if you sense that a processor has its hand too far into your cookie-jar, you may be more than just upset; you might be right. When it comes to your residuals, make the effort to stand up for your revenue stream. Those who don't, lose it. I tend to be optimistic and trusting to a fault, but some processors teach us to be shrewd _ or at least real-world savvy.
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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