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Top 10 Contract Pitfalls: A Simple Guide to ISO Agreements

By Michael Nardy

Many areas of the payments business are complicated and confusing to new merchant level salespeople (MLSs). With so many programs and compensation models to choose from, where does one begin?

ISO agreements, or contracts, are the linchpin binding MLSs to their ISO/processor. They not only secure residuals, but they also ensure that MLSs won't solicit accounts and compete with the processor once they decide to send their business somewhere else.

These contracts should protect MLSs from the processor's potential injurious activities. Good contracts will secure interests of both parties and protect them from hurting each other. Be aware of the following 10 rules of thumb concerning these agreements.

(Note: I based this article on my experience and what I would hope an ISO agreement would show for a potential MLS partner; it is not necessarily a guide that all should follow. Read agreements carefully and always consult a lawyer if you have questions about a document's language.)

1. No Liability, No Risk

Taking on liability in today's marketplace is not appropriate for most ISOs unless they have years of experience and large reserves to balance against potential losses. And for most MLSs, holding liability and managing risks on their portfolio are things they should not even consider. The risks, literally, are simply too great for MLSs to jeopardize their residual stream. Instead, they should look for programs that do not involve liability.

Nonliability programs are currently the standard in this industry; however, potential ISOs should read documents carefully to make sure that no clauses transfer responsibility for unpredicted losses to the ISO or MLS.

2. Residuals Paid With No Minimums or "Quotas"

MLSs should be 100% vested from the first day they begin working with a processor. If they send in a deal, their residuals should be protected and paid on time (or paid per the pay schedule) without any vesting period for receiving residuals.

They should also look for agreements that have payment minimums. For example, an MLS must earn at least $300 in residual to receive a check or automated clearing house payment. Some processors may cut off MLSs completely; others may simply wait until their residuals accumulate to that $300 minimum mark to cut them a check.

From the processor's standpoint, this may be a way to "trim the fat" so to speak, but it puts a sour taste in any MLS's mouth to have even a small residual cut off. The name of this business is recurring revenue; it should recur no matter what.

3. Residual Stream Ownership and Transferability

While processors and banks may own merchant contracts, MLSs can and should own their own residual stream. Having this requirement in the contract enables MLSs to sell their residuals, hold them and keep getting paid, pass them along to heirs and assigns, or take out a loan against them.

A potential problem for MLSs is if they should die or become disabled. If their will enters probate, their heirs should be able to pass notice to the processor notifying it of a new account in which to pay residuals without a problem. Similarly, if MLSs are unable to work, per the agreement, they should have transferability rights that allow another to take over the contract.

4. Nonexclusivity

In exclusivity agreements, I often find that it is not the desire to leave a processor but the need to explore other options. Once comfortable, most salespeople will stay. However, I do get calls from some who say "I'm happy, but I'm not." If something is missing in the relationship, MLSs should be able to explore other options without feeling like they will be cut off.

5. Third Party Sell Rights

These rights go along with the ability to transfer residuals and the contract to another party. While the processor may not wish to buy residuals at the time MLSs want to sell, they still should be able to offer their residuals for sale to a third party. It is not uncommon for the processor to request the right of first refusal; however, whether MLSs transfer to another party or to a leasing company for a portfolio loan, the processor should allow the transaction.

6. The Big "What if ... ?"

MLSs should always consider the future of a company when choosing one with which to sign. While the processor may wish to sell or merge with another company, how would that affect their residuals? If the processor sells its accounts, residuals or the company, salespeople should make sure that they are protected.

We at EPI have implemented a contract that allows for three levels of protection should we decide to sell. We suggest that you as MLSs do the following:

  • Take a buyout that the processor suggests. A one-time buyout for all your accounts will put money in your pocket and leave you on good terms with the processor.

  • If you didn't want to take the buyout that the processor suggested, negotiate your own buyout because you have third party sell rights.

  • Should the processor sell, you should have the right to keep operating under your renewable ISO agreement as your former processor was operating. In other words, keep getting paid as per your original ISO agreement. If the processor sells, then it may not accept new business from you because its new Schedule A may be different than your older one; however, it should still pay you according to your old Schedule A.

When businesses are bought outright, liabilities and assets are sold. These liabilities would also include (in my opinion) contractual liabilities, that is to say, the ISO agreements a processor has outstanding.

Processors that give MLSs agreements should expect them to read the agreements and comment on pricing and terms. If they are unwilling to negotiate or at least hear the MLS's side of the coin, how willing will they be to talk two years down the road when they are about to cut them off because they just sold their portfolio?

7. No Requirement to Buy Equipment From the Processor

MLSs should be able to purchase supplies and equipment from any company that they choose without hurting the relationship with their processor. The processor may offer special programs and require their partners to buy terminals or software from them in order to enjoy the benefits of a particular program. However, on a continual basis, salespeople should be able to buy equipment from vendors of their choice.

8. Contractually Accurate Residual Reporting

I think this is a crucial and an underestimated part of the signup process. A particular processor may offer a great program, but if it does not have the residual and online reporting to back it up, then how will MLSs check the accuracy of their residual amounts?

One of the first things MLSs should do when looking over an ISO agreement and pricing is to check out the online residual reporting. Before signing anything, they should make sure that they understand how the processor reports residuals and when it pays them. Knowing the practices with regard to how and in what format it displays residuals is crucial in making sure that what MLSs agreed to is actually how the processor will compensate them.

9. Paying to Become a Sales Representative

MLSs should not have to pay to become a sales representative. Many programs charge a fee of several thousand dollars to sign up, but most provide sales reps with the same tools and information available free of charge from other companies. Buying equipment or leasing a terminal to gain industry knowledge is not necessary in today's marketplace. MLSs should review other programs that don't require upfront purchases or commitments to help them avoid the wrong program.

10. Communication Is a Key Factor

An open dialog with the processor is essential for a successful relationship. An open dialog extends beyond simply negotiating the ISO agreement with the processor. Calling or e-mailing "the boss" or upper management is one step in keeping that dialog open.

MLSs should always make sure that the agreement is signed by someone in the upper management, i.e. the Chief Executive or Chief Operating Officer. I know of contracts that have come back signed but with fake signatures from the owner. I also know of negotiations made in good faith that were not honored.

There are many good processors from which to choose when deciding where to send business. Growing with the right one is a rewarding experience, and you can achieve success in this industry by following some key points when negotiating the ISO contract. Should you need any guidance or help, call or send me an e-mail.

Michael Nardy is Chief Executive Officer of Electronic Payments Inc. (EPI), a private transaction and payment processing company. He is also a founding sponsor of NAOPP. For more information, e-mail him at mike@elecpayments.com or visit www.epiprogram.com .

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