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Article published in Issue Number: 061202

Who gets a bite of your biz?

By Adam Atlas, Attorney at Law

What makes you work hard? If you are an ISO or merchant level salesperson (MLS), chances are it's the expectation that your efforts will lead to correspondingly healthy residuals.

When someone you do not know offers to introduce you to a new business partner in the merchant acquiring business, always pause to consider what's in it for the matchmaker. Make no mistake, I am all in favor of referral fees, commissions, kickbacks and the like, but I am even more in favor of participants in our industry knowing when these kinds of payments are being made on their portfolios.

Here are points to keep in mind concerning these payments when establishing new relationships in our industry:

Get used to kickbacks

If you don't like someone else earning a little something for making an introduction for you, you are in the wrong business. By the time a merchant begins processing with a given acquiring bank, there can be as many as a dozen different entities collecting some kind of commission directly or indirectly from the merchant business.

You should never expect these kinds of payments to disappear because, like them or not, they drive our industry, and they're here to stay.

Push for transparency

No matter where you are in the merchant acquiring hierarchy, it is in your interest to know who is being paid what. "Knowledge is power," the old saying goes. In all of your negotiations, make some effort, overtly or subtly, to at least get a feel for how much the parties involved are being paid.

Be diplomatic

Many people who receive commissions to provide introductions would rather that you not know they are earning commissions. So, be diplomatic and cautious when inquiring about what other people are earning. It can often do more harm to your business relationships to inquire about commissions for referrals than the information is actually worth. Before asking a lot of big questions, think about how important it is for you to know what people are earning.

Monitor professional ethics

Lawyers are legally bound by codes of ethics obliging them to disclose conflicts of interest to clients. As such, if your lawyer introduces you to a new business relationship, the lawyer is obliged to disclose to you any conflicting relationships that he or she may have that could cloud his or her judgment.

For example, if Larry Lawyer introduces you to Peter Processor, and Peter Processor is going to pay Larry Lawyer a percentage of his revenue on your accounts, Larry Lawyer is obliged to disclose this conflict of interest before making the introduction. That conflict of interest may lead you to decide you would rather not work with Larry Lawyer or Peter Processor.

Individuals who are not either lawyers or other professionals with binding codes of ethics are not bound by such disclosure obligations.

Put it in writing

Any relationship from which you expect to earn material revenue is worth documenting in writing. Some informal commission relationships rely on good faith between people who know each other. The payer of a commission may be put off by being asked to make a written promise to pay the commission.

Pay your taxes

Commission income is still income. Make sure you declare all income you should declare for tax purposes. Consult an accountant to help you make the best characterization of your income. Some people think of commission payments as separate from their regular income. While it is distinct, it is still a form of ordinary, taxable income.

Respect confidentiality

Before asking too many questions about compensation packages, remember the people with whom you are negotiating may be bound by confidentiality provisions preventing them from telling you what they earn from your deals.

By asking people what they are earning, you may be enticing them to breach the same agreements by which they are being paid.

Examine assumptions about liability

Individuals who receive commissions rarely expect to be liable if there is fraud in the accounts on which they are earning commissions. However, some payers of commissions expect to collect something from the people receiving commissions when accounts cause liability.

Keep it legal

Some informal commissions are blatant breaches of contract and could even be characterized as illegal bribes. Be careful not to get caught up in receiving or paying commissions that have the slightest risk of being in this category.

For example, if Peter Processor initially declines a merchant application but says he will accept the deal in consideration for a payment "on the side" of some of the revenue on the account, Peter is doing something his bosses would not like. There is great temptation among underwriters at banks and processors in our industry to stretch or even go beyond the limits of their entitlement in order to earn some extra money.

If people working at processors or banks want you to pay them something directly (as opposed to making a payment to the institution for which they work), you should know something is fishy.

Everyone in the merchant acquiring business earns a living from commissions. A challenge for all participants in the industry is to discern when paying a commission is a sensible cost of business and when it is an abusive or illegal detriment to success.

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 or call him at 514-842-0886.

Article published in issue number 061202

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