The Green Sheet Online Edition
July 7, 2019 • 19:07:02
Street SmartsSM
What MLSs should expect from ISOs and processors – Part 2
In the first article of this two-part series, published July 8, 2019, Emily discussed expectations merchant level salespeople (MLSs) should have of their ISOs or processors. This follow-up article is about contract negotiations, a time when expectations can be clarified and set forth in writing.
Negotiating a contract involves many important steps. Typically, the flow goes something like this: sign non-disclosure agreement, negotiate pricing schedule agreement, negotiate agreement terms and conditions, sign documents, and renegotiate.
I reached out to my friend Charles Bishota, founder of Bishota Law, for his expertise on negotiation steps. Charles brings a unique perspective to his work as a payments attorney: his career before law school included more than 12 years of employment at two major processors. I've incorporated his advice and reflections on "must haves" into this article.
Non-disclosure agreement
The non-disclosure agreement (NDA) creates a relationship between two or more parties, usually to protect confidential and proprietary information or trade secrets. This is generally the first step in a negotiation. Once the NDA is executed, the discussion about pricing begins, and you will typically receive a pricing schedule.
Charles' top three must-haves: 1. Make sure the NDA is mutual for both sides. 2. Expand the NDA to include the salesperson's information, as well as all the merchants and prospects respectively disclosed. 3. Include a non-circumvention provision. This ensures any disclosed merchant or agent information is protected.
Pricing negotiation
The pricing schedule generally lists all buying rates. When this is presented, it is time to negotiate splits, general buy rates, etc.
Agreement terms and conditions negotiation
This is a broad subject, so I have broken it into sections.
- Protect residuals
This is the most important part of your agreement and the reason you work so hard. Residual income must be protected, and it's the job of the ISO/MLS to abide by the terms and conditions.
Charles' top three must-haves: 1. Determine if circumstances exist when the residuals can be taken away from you. Ideally, there will be none. 2. Make sure you are paid residuals based on all the revenue the ISO or processor receives from the merchants you solicit. 3. Confirm you will receive residuals for as long as the merchant is active and processing.
- Pricing protection:
Your buy rate and split should be safe. If pricing or the split changes after signing, it affects your commissions.
Charles' top three must-haves: 1. Throughout the term of the agreement, your processing buy rate shouldn't change. If this isn't an option, ask for an ability to terminate the agreement. 2. Any changes for card brand requirements should be based on an actual change received by the ISO in writing. 3. Ask for a right to review the ISO's costs in the event of a third-party increase.
- Mitigate liability
If you have a retail deal (in which the processor holds the risk on liability), it's important to recognize clawback clauses that could hurt your business.
Charles' top three must-haves: 1. Ensure you aren't liable for actions taken by the ISO or processor that lead to fine assessments or merchant losses. 2. Make sure you are not personally guaranteeing the performance of the contracts. 3. Be aware of performance obligations such as minimums included in the agreement.
- Minimize future fees
Many in this industry are known for adding "compliance" or "product" fees after a contract is signed. Such fees are simply revenue streams for the ISO/processor. It's essential to validate all fees ‒ present and potential.
Charles' top three must-haves: 1. Ask that anticipated changes in pricing be communicated to you in writing. 2. Be clear about all fees you will be billed, and ask for the right to negotiate (or opt out of) new fees that are introduced. 3. Make any change or addition of fees a material event, and ensure you can terminate the contract in the event of such changes.
- Limit other liabilities:
Many other liabilities could hinder your growth. It's imperative to limit these in your agreement.
Charles' top three must-haves: 1. Make sure your rights to residuals aren't capped by the limitation of liability language. 2. Ensure any indemnification in the agreement is mutual. 3. Ensure rights to deduct fees or debt from your residuals are limited to undisputed charges or fees only.
- Protect your portfolio:
Protecting your customer portfolio is also critical when negotiating a contract. It ranks right up there with protecting your residuals. Charles' top three must-haves: 1. In the event an ISO or processor sells, ask that the obligations associated with your residuals be transferred to the new owner. 2. Ask for an opportunity to be included in the sale of the ISO portfolio at the same multiple the ISO is receiving. 3. Ask for the right to sell other products to your portfolio without violating your agreement with the ISO/processor.
Document signing and renegotiation
Everything is finalized when documents are signed. Remember, the agreement is only fair if it's fair to both parties.
When you reach the end of your contract's term, you should be set to renegotiate your existing agreement with better pricing. Changing a provider has challenges, including attrition which was at 20 percent for Impact PaySystem on our last conversion. Ask yourself whether a new deal is lucrative enough to enable you to afford a 20 percent loss in merchants.
During renegotiations, you should have perfect leverage if you delivered what you promised at the beginning of your relationship. The beauty of remaining with the same processor/ISO is that you can negotiate new pricing and have it go into effect on all your merchants, including past merchants. Instant raise.
The downside is that you're stuck with one relationship. This means you may not have access to all available platforms. This can be a deal breaker for many reasons, such as lack of integration and unsupported hardware or terminals. Eight years ago, we had only one processor and one platform. Today, we have many platforms, which facilitates equipment placements. This alone is worth the card brand's registration fees. Do your due diligence; don't settle for the first company that comes along.
I hope you find value in this two-article breakdown of a deal ‒ from service provider expectations to contract negotiations. I want to thank Charles Bishota for taking the time to answer my questions. Safari Njema!
Dee Karawadra is president and CEO of Impact PaySystem, and Emily Karawadra is the company's chief financial officer. Since 2001, Impact PaySystem has been a leading provider of payment processing technologies and services to merchants throughout the United States. Through alliances with payments industry leaders such as Chase Paymentech, First Data, Buypass, Sage and more, Impact PaySystem offers tailored solutions to meet the unique needs of each merchant. Dee and Emily will welcome your questions and comments at dee@impactpays.com and emily@impactpays.com, respectively.
Whether you want to upgrade your POS offerings, find a payment gateway partner, bone up on fintech regs or PCI requirements, find an upcoming trade show, read about faster payments, or discover the latest innovations in merchant acquiring, The Green Sheet is the resource for you. Since 1983, we've helped empower and connect payments professionals, starting with the merchant level salespeople who bring tailored payment acceptance and digital commerce tools, along with a host of other business services to merchants across the globe. The Green Sheet Inc. is also a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals.
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