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Residual reporting: An evolving story

By Michael Nardy

Residuals are the lifeblood of ISOs and merchant level salespeople (MLSs). Yet I often get calls from ISOs complaining about their residual reporting. Surprisingly, many don't even know what residual reporting means.

Not knowing how residual streams are assembled or what comprises them is a serious deficit for payments industry professionals. It shows a lack of financial responsibility. It also leaves MLSs vulnerable to unscrupulous parent ISOs that may be inclined to skim profits and hide or obscure the truth when reporting revenue and profit figures.

This article should help you, as ISOs and MLSs, determine what to look for when comparing different processors' residual statements and online reporting.

Once upon a time

In the late 1990s, when I was new to this business, my initial residual files were delivered to me on CD via FedEx. Also inside the package was a check providing compensation for the first six months of my bankcard career. (After my company switched to direct deposit, the disk containing residual files still came, but money was automatically credited into my checking account.)

I had no online reporting of deal status or pending accounts, and I had no way to audit merchants' transactions or their monthly revenue. All the reporting revealed was my buy rates, sell rates and the volume of each revenue stream on which I was paid.

For many years, this is how it was: You signed a deal and had your buy rate. You knew you were going to make a certain amount on each qualified, nonqualified and mid-qualified sale. And then you had your markup in a statement fee or annual fee. This is the way most of us were introduced to the business and how we were paid.

Left in the dark

In a way, the buy-rate program and a very minimal approach to residual reporting was an easy way to audit residuals and track portfolio growth. It offered a convenient sort of simplicity. However, there are too many unknowns under this old model. For example:

  • What are the volumes of rewards cards, and where are they being reported?
  • What if a card were downgraded to nonqualified or mid-qualified and had a markup of 200 basis points, but only 20 basis points were paid to the MLS?
  • What if numbers were skewed so the number of transactions on which the MLS was paid was lower than the number of transactions on which the processor collected revenue? (This could easily happen if a processor paid on transactions captured but billed on transactions authorized, declined, returned and voided.)

Technology to the rescue

Fortunately, you no longer need to waste time pondering such questions; the industry has changed dramatically. New technologies have revolutionized the way merchants process financial transactions. And just as important are the tools ISOs have been given to help increase deal counts, residuals and the length of their careers.

It's hard now to imagine a world without real-time merchant reporting. It has become such an important business tool. Just think about the major players in our industry trying to process hundreds of thousands of applications per month without a stable and reliable database system. It would be complete chaos.

Moore's Law states that the power of the CPU (the microprocessor chip inside computers) doubles every 18 months. Moore's Law notwithstanding, if there had been no technological developments within processing companies and ISOs, this industry - which has grown significantly over the last 15 years - would never have seen such success.

Online reporting and access for ISOs is essential for ISO and MLS growth; it has also proven invaluable to MLSs for tracking their deals. With these advances in portfolio and residual management, the old standard of five lines of reporting many MLSs became accustomed to just doesn't cut it anymore. You deserve more, and you can get it.

A new reporting era

Increasingly, I am seeing a much more complete type of residual reporting. But reporting is still a work in progress in this industry. Assuming most ISOs process transactions under revenue share programs, here is a general way to understand what residuals are.

Residuals are simply monies due to sales agents or sales organizations from the ongoing profitability on accounts they signed up. The type of program or the type of schedule (like Schedule A pricing that ISOs and MLSs typically use) to which you have agreed dictates the kind of residual you can expect and the type of reporting you will receive.

I look at residuals as total revenue derived from a merchant, minus the fees charged by an ISO or processor, and then split according to the Schedule A negotiated by the MLS or ISO partner.

This is a pretty all-encompassing view of what a residual can be. Ultimately, if there is revenue, it should be shared by the processor with the ISO or MLS responsible for bringing the account to the processor. Today, I see more ISOs reporting interchange line items on residual reports, indicating each level of interchange at which a merchant's transactions qualified. I am pleased to see more and more ISOs providing access to merchant statements, merchant pricing (you'll be surprised which ISOs don't provide access to the current rates merchants pay) as well as merchant processing volumes, based on card types and the number and types of transactions run.

As technology and the needs of ISOs and MLSs increase and become more refined, processors' residual reporting offerings will respond accordingly. Keep in mind when negotiating with processors what type of reporting you want and what is now technically feasible. And let your needs be known.

Proper closure

In a post to the GS Online MLS Forum, a member asked whether others receive residuals when an account closes. For example, an open account transferred its ownership to a new owner but still produced revenue for the ISO for another month.

The new location was brought up and running mid-month. So, technically, two locations were active, but only one (the new one) was listed on the residual report. Several forum members who get residuals on closed accounts responded that any revenue generated from a merchant account should be paid to its corresponding ISO or MLS. The resounding thought on the subject was: If revenue was generated for the processor, then so, too, should the ISO or MLS be paid.

Happily ever after

I tell all potential ISO and MLS partners they need to trust in their ISOs. Ultimately, trust is a huge factor in ISO selection. Do you trust in the data you are able to view? Do you have any reason to think that your ISO would not properly report something?

Access to accurate and timely residual data is just one offshoot of a healthy and profitable ISO-MLS relationship. Delving into a potential partner's residual reporting before you sign a contract is one of many ways you can identify the best partner for your business.

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 ISOs and MLSs profitable partnership programs and cutting-edge tools to help their portfolios grow. To learn more about partnering with EPI, visit or e-mail Nardy at

Article published in issue number 061001

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