Wednesday, May 24, 2023
"CardConnect has identified an incorrect calculation of Gross Processing Revenue (GPR) that resulted in an overpayment of residual payments from January of 2018 to December 2022 to certain partners originating with Ignite Payments, including you," CardConnect administrators wrote. "CardConnect will begin collecting these overpaid residuals effective with April Residuals paid in May 2023."
Noting that overpayments were related to expenses billed to CardConnect from card brands that were not passed through to downstream partners and agents, the company attributed errors to the following:
Hence, the company noted, if total amounts due were not collected within a specified time frame, "we reserve the right to extend the collection time frame."
CardConnect advised affected sales channels to consult their online partner portals for specific liabilities and amounts due. Detailed MID-level reports can be found under "Residual Backbill," the company noted, including "timelines associated with the collection of overpaid residuals."
Acknowledging these actions may harm partner relationships, CardConnect stated it will not retroactively change GPR payout percentages as a result of its findings, which the company positioned as a "net benefit to Agents." Merchants, however, will be back-billed for network association fees that were underbilled, CardConnect noted, stating the income of this action will be deducted by back bill collection.
Allen Kopelman, co-founder and CEO of Nationwide Payment Systems, said he received numerous calls from impacted ISOs and merchant level salespeople (MLSs). "This so-called Impact Reporting can be upwards of $100,000 for partners who have already paid their agents," he said. "People are consulting their processing agreements and lawyering up."
Kopelman went on to say that his firm has twice been overpaid by processors. In one instance, he contacted a processor about an overpayment, and nearly a year later the company acknowledged the error and told him to keep the change. In another incident, he recalled a processor had failed to bill a small fee to merchants for about nine months, but his processing agreement stipulated residual chargebacks could not extend beyond 60 days.
"They said, 'We know your contract says 60 days, but what are you willing to do?'" he said. "We agreed to split the difference and paid it back over six months, so it wasn't a big impact."
James Huber Esq., partner at Global Legal Law Firm, reported his firm is working with multiple clients affected by the CardConnect GPR issue and stated these issues are negotiable.
"We worked with First Data several years ago on a similar issue and obtained reduced amounts and payment plans on behalf of our clients," he said. "You can't snap someone for hundreds of thousands of dollars and cause them to default to their agents and staff."
Huber further noted the issue is especially thorny for ISOs that made residual payments to employees, which raises the question of how to pull back wages. To a certain degree, there may be an equitable estoppel argument, he said, in which an ISO asserts a processor can't recover a business owner's monies indirectly from other people.
Christopher Dryden, managing partner at Global Legal Law Firm, agreed the issue is complicated for an employer's accounting and compliance teams, who may have to amend tax returns and potentially be flagged for an IRS audit.
"From an administrative standpoint, will I have to reissue 1099s to make them accurate?" he said, adding, if they need to go back and redo things they've already completed, who will bear the costs?
Dryden pointed out that some agreements have a 30-day review period in which ISOs can review and contest residual reporting. When these reports are not issued within appropriate time frames, the processor has breached its contractual duties, and ISOs can argue that they didn't have enough time to review the reports and make a competent decision, he explained.
Huber has seen a variety of responses to the CardConnect memo, including partners who decided not to spend money on a lawyer, as amounts in question were not large enough to justify the expense. In some cases, he stated, ISOs have agreed to a residual claw back, even if further back than the one-year look-back period stipulated in their processing agreement. These ISOs have bargaining power, he added, and can decide if they want to keep sending deals to CardConnect.
"CardConnect is looking at short-term revenue recovery," he said. "Long term, it's going to be awful for them." 
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