n ISO client recently told me a horror story that I had never heard before. The ISO sent a number of merchants to a large national bank. After enjoying the residuals of the merchant portfolio for a few years, the ISO started to see parts of the portfolio dwindle away.

Some of the attrition occurred because of normal reasons, such as merchants going out of business or competing banks pitching merchants with alternative packages. However, some of it was caused by the very bank for which the ISO was selling. Of all the ways to lose a merchant, this is the one that hurts the most.

Because ISOs must place so much trust in their bank partners, it is especially unsettling to see the bank with which the ISO has built a trusting relationship use its own agents to pillage merchants from the ISO's portfolio.

If you were an ISO in this situation, what would you do to prevent this from happening? Following are a few tips, from a legal perspective, on how to reduce some possible attacks on your merchant portfolio that often lead to merchant attrition:

Bank Noncompetition

Consider requesting from your sponsor bank a guarantee that it will not knowingly resign any of the merchants you have sent to it. This is a basic courtesy that an acquiring bank can easily extend to its ISOs. Of course, some of the larger banks that dominate considerable portions of the market might have difficulty in agreeing to do this.

Customer Service

Whether or not your ISO or agent agreement requires you to service your merchants, being good to merchants will also likely be good to your bottom line. A lot of merchant attrition is the result of otherwise preventable customer service issues. Treat your merchants like you would tend a garden: Take care of them, and they will take care of you.

Agent Noncompetition

If you are an ISO with agents working for you, make sure to include in your agent agreements terms that prevent agents from moving merchants away from your sponsoring bank once they have helped you sign the merchants.

Clear Agent Start and Termination Dates

Banks are not always aware of when your agents become active or inactive. This is changing, however, because banks now keep better track of ISOs' agents. It's imperative to find out when an agent stops working for you.

If an agent no longer officially works for you, but he still thinks he does, he could do a lot of harm to your business. For example, the agent might violate a card Association rule for which a bank decides you are liable.

In this case, you could have avoided liability for the rule violation had it been clear to all parties involved that the agent was no longer your agent. It's also important to know when an agent officially becomes your agent. This will help determine which merchants you should include in your portfolio or in the portfolio of the agent's previous ISO.

ISO Porting

I am always impressed by the number of merchants that ISOs manage to board on a monthly basis. The sales that occur each month in this industry are simply astonishing and speak to the caliber of the people involved in payment processing.

I recently asked someone from a large ISO how the company managed to keep its deal count so high. He said when they hire new agents, the merchants that the agents signed with their previous ISO/bank often came with them. Apart from the fact that this "porting" of merchants is often illegal, and certainly unethical, it is a common practice in this industry.

I pass no judgment on anyone; rather, I prefer to simply warn readers of the dangers that this kind of portfolio porting brings to banks (both the former bank and the new bank). The old bank may lose the business, but the new bank gains a tainted portfolio, one acquired by potentially illegal violations of noncompetition or nonsolicitation clauses.

I recommend that all ISOs and agents pause before engaging in this kind of activity. The amount of harm done by unethical moving of merchants far outweighs the profit gained. That's it for this month's sermon.

Additional Services

As ISOs/merchant level salespeople (MLSs), you have a greater connection to merchants in a merchant account relationship than a bank has. You can offer merchants any number of services, including equipment leases, gift and loyalty programs, paper supplies, check processing and automated clearing house services.

You bring value to the relationship, and you are building ties that will bind the merchant to you. These ties are especially important to make sure that you don't lose the merchant's business to the agent of a competing bank.

Always include in your ISO agreement a provision that allows you to sell to merchants services beyond regular merchant services. Some banks will try to prevent ISOs from doing this.

Quality Merchants

Every ISO prefers to target and sign certain types of merchants. Some like high risk, some like brick and mortar, some like online and some like "pay at the pump." Whatever your preference, learn as much about these types of businesses as possible, and choose your merchants wisely to make sure that your merchant relationships are profitable, long term, stable and low maintenance.

The amount of energy that you need to spend on a given merchant is often a function of how well you understand the merchant's business. Learn about a niche market, and use that knowledge to increase your bottom line. Find the right blend of merchants that means quality to you, and stick with it.

Integrity

The integrity of your word to merchants, agents and banks is more valuable than the contracts you sign. The merchant acquiring industry is small enough that a bad reputation spreads quickly and is hard to shake. As much as your word is important, don't rely on the word of others. Instead, get it in writing.

I have to give a lot of credit to you. I believe that a large majority of new merchant accounts in the United States are signed because of the work you do. You help keep this business alive.

Your work and volume commitments help underwrite the earnings predictions of the large public companies in our business. In order to ensure that you reap as much revenue from your efforts as possible, stay close to the merchants who pay your residuals.

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 more information on this article, e-mail Adam Atlas, Attorney at Law at atlas@adamatlas.com or call him at 514-842-0886.