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A Primer on ISO Agreements

Look closely at provisions related to:

· Liability
· Termination/right to continued residuals
· Breach/cure clauses
· Residual stream ownership
· Exclusivity and nonsolicitation
· Right to move merchants
· Residuals and quotas
· Equipment requirements

The payment processing industry is awash with complicated, confusing guidelines. As an ISO or merchant level salesperson (MLS), understanding what they all mean and how they affect you (and merchants) is important for achieving success, but none of these has the potential to derail your business faster or more decisively than the ISO agreement.

And, like the shoemaker's barefoot children, many ISOs and MLSs often have a detailed knowledge of the most arcane legislative bylaws affecting the industry, yet possess a limited understanding of what is in their ISO agreement, and how it could affect them.

If any of your New Year's resolutions concern your financial future, a review of your agreement, ideally before signing, may well be in order. Like your health, when it comes to legal matters, if you have the slightest doubt, consult a professional. Peace of mind is worth a couple hours of a lawyer's time.

Read Before You Sign

"People frequently just sign the agreement that is put in front of them," said Holli Targan, Attorney and Partner in the law firm Jaffe, Raitt, Heuer & Weiss PC. "I never recommend that. Agreements provided by the processors, for example, are one-sided in favor of the processor; you can't expect anything else.

"I've seen agreements that spell out in detail what is expected from the ISO but that don't have one word about what is expected of the processor. They have no responsibilities in the agreement. That sort of contract is very difficult to enforce.

"The majority of people who call me up saying, 'I'm being screwed, what can I do?' simply signed a bad contract. And in those cases, there often aren't many options. They sort of sealed their own fate."

The best ISO agreements specify exactly what will happen in both good times and bad and satisfy the needs of all parties. After all, ISOs need hard-working, motivated MLSs, and MLSs need strong, thriving ISOs. Processors need solid ISOs, and ISOs need competitive processors, so all parties have a vested interest in the others' success.

Odds are you won't get everything you want. But carefully thinking through the issues that most concern you should help you to negotiate an agreement that covers the things that really matter. Following is a checklist of what to watch for (and watch out for) in your agreements:


Potential liability can be far greater than even the most successful residual stream. Unless you're willing to gamble with future income, look for a program that does not force you to accept liability, or at least, one that rewards you richly for accepting it.

Nonliability programs are common in this industry, but review (or have a lawyer review) your agreements carefully to make sure that none of the individual clauses transfer liability for unpredicted losses to the ISO or to its MLSs.

"The amount of liability an ISO agrees to really depends on the ISO's appetite for risk," Targan said. "The more liable you are, the more money you can make, but you really need to offset the risks. You absolutely need to know just what those risks are to be sure you're able to offset them.

"You also need to know if you will be required to make a personal guarantee or provide particular reserve accounts. Those aren't the kinds of things you want to agree to without careful consideration."

If the agreement doesn't already cover liability specifically and clearly, then insert a term that states explicitly that you do not have liability for merchant losses, recommends Paul Rianda, an Attorney who has specialized in providing legal advice to the bankcard industry.

"Most credit card processors will counter with a clause that provides that the sales agent is liable for merchant losses but only to the extent that the sales agent commits fraud," he said.

Termination/Right to Continued Residuals

Both ISOs and MLSs should make sure that their agreements detail when the moment of termination occurs, usually by written notice from one party to the other.

"It's critical for ISOs to know when agents are no longer their agents because at this point, ISOs are no longer liable for agent rule violations," said Adam Atlas, an Attorney specializing in electronic transactions and merchant transaction acquiring law.

Likewise, termination clauses in agreements with processors can have a profound impact on your finances.

Make sure that the agreement specifies that in the event of its cancellation, expiration or termination, you will be paid your residual as long as the merchants generate a residual stream to the processor.

Without this, any termination of the agreement, even one that you initiated, could conceivably end your right to any further residuals.

"Under no circumstances should an ISO's residuals be cut off," Targan said. "I approach every negotiation with that outlook. If an ISO brought business to the processor or bank, then they should reap the benefits of what they produced, even if their relationship with the processor is over. If the processor is still making money from what the ISO produced, then the ISO should be, too."

Breach/Cure Clause

Many agreements include a provision stating that if a material breach of the agreement occurs, you lose the right to any further residual. For protection, you should make sure that the provision also specifies that written notice of any such breach be provided. There also should be a set amount of time, a "cure period," that gives you time to remedy the breach and not lose the residual.

If the breach results in a monetary loss for the ISO or processor, you ought to be allowed to pay for the loss, either in one payment or have the amount taken out of your residual stream. Once the loss has been repaid, your residual should be reinstated.

Residual Stream Ownership

Look for residual stream ownership and transferability. You should own your residual streams.

Like life insurance, this is an easy clause to overlook when you're young and healthy, but disaster, or retirement, does strike sometimes.

Owning your residual streams provides you with the option of selling them, taking a loan out against them or passing them along to heirs should you die or become disabled. If you are unable to work per your agreement, this clause can give you transferability rights that allow someone else to take over your contract.

ISOs and processors frequently have the right of first refusal written into their agreements; since this is usually the fastest and easiest way to sell your residual stream and the most seamless transition for your merchants, a right of first refusal clause is generally a good thing.

Exclusivity and Nonsolicitation

Many processors will ask for exclusivity. "In general, it's better to have a non-exclusive agreement, so that if your relationship with your primary provider goes south, you have somewhere else to place your merchants," Targan said. If the market changes dramatically and your bank or processor doesn't keep up with competitive rates, an exclusive arrangement will leave you vulnerable to a substantial drop off in business through no fault of your own.

But, like liability, you may be rewarded financially for agreeing to exclusivity, and the financial benefits may outweigh the risks.

"You have to look at the whole package to see if it is appropriate or not," Targan said. "And there may be compromises agreeable to the processor. For example, you might agree to give that processor a certain minimum of business, enough to reassure them that they are your primary provider."

A nonsolicitation provision is used to keep you from soliciting merchants away from the ISO or processor at which you placed them. It frequently also prohibits the movement of merchants from one processor to another.

This provision also may prohibit the hiring or recruiting of an ISO's employees or contracting directly with the bank or the processor that the ISO uses.

A nonsolicitation provision usually survives any termination, cancellation or expiration of the agreement, so it will have an impact long after your relationship with the ISO or processor has ended.

Right to Move Merchants

Occasionally, merchants will become dissatisfied with a credit card processor and will want to move to another one. Most commonly, this occurs when merchants are unhappy with their processor's service or when their processor holds their funds.

In those cases, merchants still may want to continue their relationship with you, their sales agent. Quite rightly, you don't want to be punished for the processor's errors by losing the accounts, and the processor or ISO wouldn't want you to raid its accounts when their relationship is terminated.

One alternative is to include a clause that allows the sales agent or ISO to move merchants, but only under certain, specified circumstances. For example, the agent or ISO could be required to give the processor written notification that merchants wish to move, and then allow a set period of time for that processor to try to win the merchants back before moving them to a new processor. "These kinds of issues, those involving ownership of the account, can cause the most dissention," Targan said. "They are extremely important."

Residuals and Quotas

Read the fine print on your residuals carefully; this is your income they're talking about. Vesting deals on residuals is undesirable. You want to be vested 100% as soon as you start working with a processor.

If you send in a deal, your residuals should be paid, and protected, at the first applicable payment period.

Many agreements have payment minimums: your residuals must reach a set amount before a check is cut. This clause is to protect the processor from cutting and mailing checks that are less than the postage spent in mailing them.

Look to see if the minimum amount seems reasonable. Especially watch for clauses that cut off the residual completely if it falls under a certain amount. It is one thing to have to wait until the residual amount reaches the minimum, say $250, for your check. It's another altogether to see that residual disappear.

Equipment Requirements

ISOs or processors may try to force MLSs to buy supplies and equipment from them. Although you may well purchase all your equipment from them, it is probably not in your best interest to sign an agreement that requires it.

Having the flexibility to use equipment from a variety of sources increases the chance of making the sale. It is conceivable that processors or ISOs with an inventory of obsolete equipment could force their MLSs to use that equipment in order to clear out their inventory, even if competitors are offering more up-to-date and desirable equipment.

ISO agreements are the foundation of your business relationships. They are vital to your financial health and success. Consider them carefully, and consult a lawyer. No one wants to imagine good relationships going bad, but unfortunately, it does happen. A well-drafted agreement can save you from financial hardship, lengthy litigation and bad blood.

And, of course, the information contained in this article is for informational purposes only and should not be relied upon in reaching any legal or business decisions. Please consult an attorney before making any decisions about your agreements. Don't even think of using only the information provided in this article; it's a starting point, not legal advice.

Article published in issue number 060101

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