By Adam Atlas
Attorney at Law
For better or worse, when what has been aptly dubbed the Great Recession causes relationships in the payments industry to go sour, my phone starts to ring. To help you, as ISOs and merchant level salespeople (MLSs) prepare for some of the uglier situations I've seen arise in today's stressful financial climate, I collected six examples of negative experiences you can avoid, or at least mitigate, by taking protective action now.
When times are good, a deal on a handshake is a wonderful thing (putting aside the fact that all ISOs and MLSs in our industry are required to sign agreements according to card company rules).
However, when times are difficult, even people with good intentions tend to renege on oral agreements and adjust them in their own favor.
I've recently encountered a number of people who have been paid for months, or years, at a certain rate. But they have no written agreements setting forth their compensation terms, and they are now being told they will be paid less.
Reasons given for these lower payments have to do with the downturn in the economy, increased costs of financing and increased costs associated with acquiring new merchant accounts.
Without signed agreements, those who are being shorted have no recourse. The solution is to get signed agreements with all payment terms clearly set forth.
However, those most needing signatures are in a weakened bargaining position in this economy because their reliance on residuals may exceed their confidence in their ability to bring in new business.
So, base your working relationships on written contracts. Not only do the rules require it, but you may also need that signed document to protect your income one day.
It is customary in our industry for acquiring organizations to change pricing schedules when costs, such as dues and assessments, change. However, it should not be acceptable for acquirers to suddenly change either the percentage payable to ISOs and MLSs or buy rates for ISOs and MLSs if the acquirer has not incurred any documented increase in costs.
Ultimately, your agreement will determine the rights that an acquiring organization has to change your pricing. And that right will vary according to the wording of your contract.
Acquirers often start tinkering with minimums when they are looking for extra money. It's important from the start to understand exactly how your minimums are calculated and to do test calculations so your minimums cannot be changed arbitrarily.
Minimums should be made clear to all parties to an agreement before anyone signs it. In these new economic circumstances, I recommend that new deals include a sample calculation of minimums so no one is surprised as to how they will be calculated at some point in the future.
Lately, many ISOs feel like they're renting cars: When you rent a car these days, you are likely charged a bevy of extra fees that bear no connection to the contract you thought you entered into.
These can include road taxes, fuel charges and delivery charges. Similarly, ISOs are seeing new fees tacked on to their pricing grids that materially alter the nature of their income.
Parties should make their agreements as clear as possible in terms of the right of acquirers to add extra fees for which ISOs are liable. Agreements should also spell out whether ISOs are able to pass such fees on to merchants.
For example, one acquirer has asked ISOs to finance the monthly billing of merchants. So, if you have a large merchant account in your portfolio that is in the habit of paying its merchant acquiring fees monthly, as opposed to daily, you are asked to pay upfront the entire sum of fees that are expected to accrue during the coming month for the merchant.
For a decent-sized ISO, this could add up to hundreds of thousands of dollars, which is hard for anyone to come up with these days.
Acquirers that once routinely paid on time and in full are sometimes neither paying in full nor on time. Many agreements require ISOs to notify their acquirers of such a shortfall within a limited time of the erroneous payment or nonpayment of residuals.
Diligently inspect your residual payments, and send your acquirer default notices as soon as you notice you are not being paid in full or on time. It is important that you not miss the window of opportunity within which to file such a notice of default. It is often as short as 30 days.
If you cannot pay your best friend what you owe him or her, the friendship is going to suffer. A significant number of acquirers, ISOs and MLSs have long-standing friendships. And because of how leveraged some acquirers are at present, they are prioritizing some obligations and neglecting others. This is causing a number of relationships to fray and even break apart.
The personal finances of those who own acquiring organizations are also under strain, and that is being felt in the marketplace. The delicate cooperation required between acquirers, ISOs and MLSs must survive these difficult times; otherwise, the "golden goose," (the merchant portfolio) is going to suffer.
And like all stressful periods, these hard times will be remembered by ISOs and MLSs alike as defining who the team players are and who is willing to cooperate for the greater good.
I would like to stress the importance of solidifying in writing all agreements pertaining to merchant acquiring. Said contracts should be very clear as to how residuals, minimums and other trigger amounts are calculated. Doing this will avoid disappointment and confusion for the duration of the agreements.
In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If you require legal advice or other expert assistance, seek the services of a competent professional. For further information on this article, e-mail Adam Atlas, Attorney at Law, at atlas@adamatlas.com or call him at 514-842-0886.
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