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Street SmartsSM:
What is registration anyway? - Part III

By Michael Nardy

The second article in this three-part series described the registration process for distinct ISO models. This final installment discusses some of the more misunderstood aspects of ISO registration.

Risky business

Many ISOs and merchant level salespeople (MLSs) think, "I have some cash; my accounts have never taken a loss; why don't I hold liability and make more money?" Maybe your portfolio has never taken a hit. But what if it did? What if you boarded a merchant whose business flew under your radar until three months down the road, and then every one of the merchant's transactions resurfaced as a chargeback? Could you handle that?

Holding liability is a serious thing. It's easier to be a sales and marketing organization with zero liability that lets increasing monthly volume build its portfolio rather than a full-service ISO with worries about one flawed underwriting decision potentially decimating its portfolio.

Also, for the equivalent of one risk manager's salary, a sales and marketing ISO can hire two or three internal sales reps.

Can you sleep at night knowing that a rogue merchant could erase your entire portfolio and business track record? Would you be OK if you lost $50,000, $150,000 or $500,000? If so, look into a liability relationship. If not, stick with zero liability.

The ACH headache

I have numerous conversations with ISOs that involve variations on this opening line: "My merchants have never taken a loss; why shouldn't I take the plunge?"

OK, maybe you've never boarded an unscrupulous merchant, but what about losses from automated clearing house (ACH) rejects, uncollected early termination fees and unreturned equipment?

ACH rejects happen when merchants process transactions, but then you can't debit their accounts to collect end-of-month merchant fees. Even small amounts, like $10 statement fees, add up. You have to absorb the reject fees, re-debit processing costs and then fees related to collections, court costs and, of course, the losses.

If a merchant defaults on $228.36 that you billed for end-of-month fees (which include, let's say, $163 to cover interchange costs), you have to recover that $228.36, or at least the $163 interchange cost you've incurred. How do you do this?

You try to re-debit the account, send the merchant a letter or try a phone call. Then you try it all again. This can result in prohibitive collection expenses.

Even if you never experience a catastrophic loss, ACH rejects and related fees can still hand you $20,000 in losses per month.

Moveable feast

Portability is the ability to move accounts from one bank to another, from one processor to another or from one network's front end to another. Portability is usually addressed in the ISO contract, not during the registration process.

Some programs offer portability if you pay exit fees; others don't. If you are privileged to have a direct bank relationship, you may achieve portability, but it might be restricted to certain front ends.

One thing you can achieve with registration is ownership of your residual stream so that you can keep it ... even if your ISO sells its portfolio or business. However, you may also attain this with the right MLS contract, without incurring the full registration expense.

Once again, it all comes down to your contract, be it with your ISO, bank, network or processor.

All aboard ...

There are real costs associated with boarding merchants. From the time applications come in, you are paying underwriters' salaries and paying for peripheral costs such as credit report pulls, voice authorization setups and more.

If you rely on your ISO for programming, you may have to pay for it. If you do the programming in-house, you may have several servers set up for downloads and file builds. Servers are not cheap. The requisite modems, phone lines and the tech support staff all cost money too.

NURIT's Terminal Control Center costs roughly $500. Hypercom's ITermMaster (Internet based) has costs per server, per file, per minute and per month. Its in-house software and download server are even more expensive. VeriFone's VeriCentre retails for $8,000. These figures do not include the expense of phone lines, modems and training staff to build the files.

Then there are welcome kits. You probably don't have the volume to get pricing on 10,000 overlays, so you'll be ordering kits in groups of 500 or 1,000.

Each overlay may cost from $1.35 to $5, depending on the machine it's built for. Add the costs of welcome kit assembly, merchant imprinter plates and postage, and the process of boarding an account from start to finish may reach $20 to $30, or more.

Agents as assets

If you have anything like a 50/50 split with agents, most likely you will be giving away half your income right off the bat. Even so, the agent channel can be lucrative for your business. But watch out for the bad-apple agent.

Perhaps you and your company have always operated aboveboard. You've never asked a merchant to sign a blank contract or altered pricing after an agreement was signed; you've never submitted fictitious banking information with a deal.

Unfortunately, not all agents share your integrity. As an ISO, you not only have to watch your merchants, you need to watch your agents as well.

I have seen ISOs with subagents who were forging paperwork, collecting bogus application and/or equipment purchase fees, altering contracts without authorization, forging signatures and worse.

Remember that the primary relationship is between you and your ISO or bank, so you and only you are responsible for your subagents.

It would be unfortunate if you were held liable for unethical deeds committed by your subagents, but generally that would be the case. This can, of course, have a negative effect on your company's residual income and ISO agreement.

To employ or not to employ

I've heard potential ISOs say, "Oh, that's OK. I have hired reps only. They never do anything against my rules."

Even as direct employees, internal reps sometimes encourage merchants to sign blank applications or price MO/TO merchants at retail rates, knowing the surcharge on key entry is going to be lucrative. These practices are not exclusive to external reps; they happen across the board, and you need to watch out for this.

In addition, if you hire reps, you have salaries, Social Security and Medicare taxes, federal and state unemployment and employment taxes, insurance and other related costs.

Agents can, however, increase your apps per month, and cultivating a strong agent channel is a top priority for numerous organizations. Many ISOs try to please their agents just as much as their merchants.

Some helpful questions

Answering the following questions should help you decide whether registration is a wise step for you at this point in your career:

What caused you to consider registering? Was it a natural progression? Or did you get to this juncture because you were slighted by other organizations - registered or not?

Are you looking for better pricing, more control, a better split? Or do you want to market your name as a registered ISO/merchant service provider that is recognized by the card Associations?

If you were not happy with your former ISO, registration may not be the route to greater success, and it may not eliminate the hassles you've experienced.

If you've reached the registration threshold through a smart business plan, or through the natural progression of your business activities, then you're ahead of the game.

In the end, registration requires much consideration and careful planning. It can be a very positive step, but it may also hold unforeseen expenses and responsibilities that I hope this series has highlighted.

Michael Nardy is Chief Executive Officer of Electronic Payments Inc. (EPI), a founding sponsor of the National Association of Payment Professionals and one of The Green Sheet magazine's Industry Leaders. EPI is one of the nation's fastest growing privately held payment processing companies offering ISO and MLS profitable partnership programs and cutting-edge tools to help their portfolios grow. To learn more about EPI, visit or e-mail Nardy at

Article published in issue number 060502

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