By Adam Atlas
Attorney at Law
These are challenging times for ISOs. I thought we could make it through the Great Recession unscathed. I was wrong. The recession is hitting the payments industry. Beyond greater attrition and more challenging sales, at least one high-profile processor may be teetering on the edge of bankruptcy.
Nonetheless, a number of ISOs and merchant level salespeople (MLSs) are finding opportunities in this downturn and are negotiating new relationships with processors and acquiring banks.
The purpose of this article is to give ISOs and MLSs tips as to what they should specifically have in mind on account of the economic downturn when negotiating ISO and agent agreements.
A few years ago, most people would not think about this issue. However, sales offices registered with processors are considered unsecured creditors. When a processor experiences a bankruptcy, the buyer of the processor's assets will be motivated for business reasons to retain the existing ISOs and pay them their residuals.
However, a buyer wishing to keep ISOs in place may encounter the harsh reality of the horrible financial condition of said processor. For example, processors that have dipped into merchant reserves, or ISO reserves, to sustain themselves through the downturn (something which is against the rules) may be worth much less than their ordinary market value.
Consequently, even a well-meaning buyer of the assets of the bankrupt processor might not be able to pay the residuals the processor paid before bankruptcy. ISOs and MLSs should therefore research who they are doing business with. Larger ISOs may also be in a position to demand certain representations and warranties as to the practices of a processor to give them additional comfort.
Processors that are not publicly traded are unlikely to reveal financial statements. But larger ISOs may be in a position to demand some kind of letter of comfort from the processor's auditor as to the debt to equity ratio or other ratios relevant to the ISO's underwriting of the processor. By the way, as we have learned from the collapse of the largest banks, bigger is not necessarily better in the financial services business.
Merchant reserve accounts and ISO reserve accounts are traditionally untouchable funds. Nevertheless, today some processors may find those funds irresistible. ISOs owe it to themselves and to their merchants to query processors and banks as to the balances maintained in reserve accounts.
Ideally, processors should provide their sales offices with independent verification that their reserve accounts are sound, but that will be difficult to obtain unless you are a very large ISO or the processor is a publicly traded company.
Now, more than ever, having all your eggs in one basket is to be avoided. Statistically, you run a much better chance of preserving at least some of your business if it is spread across a few channels. I recommend going beyond the traditional model of a main relationship and one or two secondary relationships.
In today's economy, ISOs should, perhaps, consider two main processing relationships. Having two important relationships is more costly and creates the risk of confusion and rule violations, but it also gives the ISO some comfort that its whole business is less likely to collapse at once.
Some processors are back-filling the holes in their income by loading merchant and ISO statements up with new and mysterious fees. ISOs owe it to themselves to keep an eye on their own, and their merchants', statements to make sure they understand all the fees being charged and whether their ISO agreements justify the fees. If your fee schedule is vague, insist on clarifications. Clarity is a friend of all parties in the acquiring business.
Whether or not you believe that the Payment Card Industry (PCI) Data Security Standard (DSS) works, you are likely to agree that making businesses comply with the requirements of the PCI DSS has become a profit center in the acquiring industry. ISOs are having a hard time justifying PCI fees to merchants, but are being required by banks to levy them.
This leaves ISOs with the challenge of finding the best way to share in bank profits from implementing security compliance standards. This is not a good time to be adding fees for merchants, so ISOs should take time to carefully plan PCI programs and find the right balance that is both compliant and business savvy.
When negotiating ISO agreements, always keep in mind your greatest strength, which is likely to be the relationships you maintain with merchants. With only tenuous legal bonds with merchants, ISOs often forget that their business relationships with them can be worth as much as the merchant agreement is worth to the acquiring bank.
Some ISOs that are having a difficult time keeping sales volumes up on the revenue that they are bringing in might attempt to renegotiate their ISO contracts to create more growth for all concerned. Obviously, this is not an ideal choice for an ISO, but a processor may be willing to open up an existing ISO deal if the deal in place puts the survival of the ISO in jeopardy.
I do not recommend renegotiating simply because you are unhappy with pricing; there should be something fundamentally wrong with the deal that makes it untenable for the ISO.
Beyond the legal considerations, there are also cost-cutting measures ISOs can implement to stay in business, about which I am no expert. But it is safe to say that ISOs that survive the Great Recession by closely scrutinizing their processor relationships and making any necessary changes will be well positioned to thrive when the recession is finally over.
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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