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pay residuals to the ISO so long as the ISO is not in mate-
rial and uncured default under the ISO agreement.

Certain breaches of ISO agreements are often negotiated
as "sudden death" clauses that come to bear in the event
Legal ease: of an ISO's intentional re-solicitation of merchants that is
not remedied, or other forms of intentional and material
wrongdoing that are not cured within certain delays.

An ISO should consider all scenarios by which residuals
can be terminated under their ISO agreement before sign-
ing it. It is best that a trivial breach not put an end to re-
Key ISO rights and siduals for the ISO.

3. Confidentiality
how to spot them Confidentiality clauses in ISO agreements should be bilat-

eral. The processor has important information that needs
By Adam Atlas to be protected, but the ISO does as well. For example, in-
formation concerning the ISO's employees, agents and re-
Attorney at Law ferral sources should be characterized as confidential in-
formation that the processor cannot use without consent
n ISO's rights are set out in their ISO agree- of the ISO.
ment. As new generations of salespeople and
lawyers have taken the reins at large proces- Occasionally, processors acting in bad faith use the ISO's
A sors, I have seen them encounter some diffi- information concerning employees, agents and referral
culty in understanding these rights and negotiating them sources as lead generation data to build their own busi-
with new ISOs. nesses. The ISO agreement should contain language pre-
venting this.
The purpose of this article is to set out a key set of rights
that all ISOs should know about whether or not they have Some processors will say that they are so big, they cannot
managed to negotiate them with their processor or acquir- possibly prevent themselves from doing business with the
ing bank. many agents and referral sources out in the marketplace.

1. Residuals Fair enough. Those processors may be free to engage in
broad solicitation, but they should not do so with the un-
The fundamental consideration for an ISO entering into fair advantage of using an ISO's information to harm the
an ISO agreement is that it will be paid residuals in re- ISO.
spect of the merchants that it solicits for the processor or
acquiring bank. If the ISO agreement is not explicitly clear 4. Limitation of liability
about the right of the ISO to receive residual payments, the Every ISO agreement is imbalanced to a degree. In the
ISO agreement is lacking a fundamental right that most limitation of liability language, an ISO's liability should
ISOs expect. not be unlimited. Fraud and other wrongdoing may un-
derstandably lead to substantial liability on the part of the
Naturally, each ISO will have a unique matrix of pricing ISO. However, ISO liability for merchant losses or fines
and revenue items that will form the basis of residual cal- caused by merchant rule breaches and merchant security
culation. The detail of calculating the residuals is different breaches should be limited as a function of an ISO's deci-
from the right to have those residuals in the first place. sion on whether or not to assume those higher liabilities.
Both are, of course, worthy of scrutiny during the negotia-
tion stage of a contract. Historically, most ISOs have not assumed liability for mer-
chant chargebacks, fines and security breaches. However,
It's important that the amount of residuals not be subject an ISO with enough underwriting expertise and finan-
to arbitrary changes by the processor or acquirer. Changes cial ability can negotiate for it to be liable for these mer-
in interchange or other typical pass-through costs are wel- chant-triggered losses. Even for such an ISO, the acquirer
come. Those changes, however, are different from the pro- is capable of causing certain kinds of merchant losses for
cessor or acquirer arbitrarily creating new fees or amend- which the ISO should still not be liable.
ing existing fees.
2. Lifetime residuals For example, a processor could double process a given
batch of merchant transactions, resulting in chargebacks
The term "lifetime residuals" has no official meaning, but and other losses, and an ISO should not be liable for that
most ISOs and agents take it to mean the processor will kind of merchant loss even if it is generally liable for mer-
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