By Adam Atlas
Attorney at Law
Merchant level salespeople (MLSs) sometimes overlook the fact that their residuals are only as solid as the ISOs for whom they sell. Simply stated, the various players in the payments industry are on a food chain where entities depend on the entities above them for payment.
The purpose of this article is to drill down into the cascading flow of residuals inherent in "portability moments," such as the sale of a residual stream or the deconversion of a merchant portfolio from one acquiring bank to another.
If you are an MLS referring merchants to an ISO, it is reasonable for you to ask the ISO to incorporate your relationship into a portfolio sale. The need for this kind of accommodation arises when the ISO decides to sell its interest in the merchants that an MLS had referred to it.
The most common kind of accommodation comes in one of two ways. An offer to pay the agent a preset buyout price might be a function of the merchants' sale price. Or it might be an undertaking by the ISO to require the purchaser of the merchant portfolio to not only buy the merchants, but also assume the rights and obligations under the agent agreement in respect to the merchants being sold.
These outcomes are a result of negotiations between parties and may not apply to your specific relationship. Nonetheless, it's helpful to be aware of the possibilities. The net effect is that MLSs maintain relationships with their merchants - and the corresponding residual income - despite the potential for portability within ISOs' portfolios.
Whether you are an ISO purchaser, seller or agent, you have considerable interest in avoiding surprises. This might sound obvious, but there are plenty of ISOs that begin negotiating portfolio sales without thinking through where agents and merchants will land when the dust settles on the transaction.
Regardless of your position, take a moment to consider what your options would be if you were to sell or buy, or if the entity paying your residuals would sell your merchants to someone else.
When thinking about protecting your rights in various portability scenarios, it is important to understand the fundamental distinction between selling residual streams and selling merchant agreements.
The sale of a residual stream usually has no impact on the mechanics of merchant agreements and relationships. Instead, the sale by an ISO of its residual stream involves the ISO assigning to the buyer its rights concerning residual compensation in respect to the merchants involved.
Depending on the terms negotiated in the purchase agreement, the buyer may or may not assume the corresponding support and service obligations for the merchants or, indeed, of the whole ISO agreement itself.
From the perspective of an MLS of such an ISO, there may be no change in operations if the selling ISO does not assign the underlying ISO agreement to the purchaser and continues to own and operate the agent's down-line revenue.
On the other hand, if the ISO agreement were assigned to the purchaser, the agent would be in a better position to have its agent agreement also assigned to the buyer so that the agent would remain tethered to the ISO that has primary responsibility over the merchants. The sale of merchant agreements may involve the selling ISO actually causing its sponsoring bank to assign to a third party all of its rights and obligations under said agreements. This has enormous implications. It means that the merchants' acquiring bank will change.
Depending on whether the seller has its own bank identification number, and on the level of cooperation and concessions acquired from the outgoing processor and acquiring bank, this process may be more or less problematic. The process is often called "deconversion."
For the agent of an ISO that puts its merchants through this kind of a transaction, a fundamental issue arises as to what the agent's and ISO's rights will be in regard to the deconverted merchants.
Those rights will be a function of what has been negotiated between the ISO and agent at the time the agent entered into a relationship with the ISO, as well as the interest on the part of the buyer to purchase any of the downstream agent relationships.
All things being equal (which they never are), a buyer will also want to acquire the MLSs that built the portfolio being purchased. The reason for this is that the buyer will see acquiring the agents as a means of reducing attrition in the purchased portfolio. As the saying goes, Keep your friends close and your enemies closer.
In this case, the biggest threat to a purchaser of an ISO portfolio, other than the selling ISO, are the agents of that ISO who have the ability (although rarely the right) to solicit merchants away from the new bank, thereby depriving the buyer of the benefit of the deal.
I'm always hugely disappointed when the buyer of a merchant portfolio and downstream agents decides, upon the purchase, to revamp pricing for everyone from merchants to agents. Other than greed, a motivating factor in making changes to pricing is that the seller's financing status may not be the same as that of the buyer. Remember, buyers rarely use their own money to purchase portfolios. Consequently, buyers may not be able to afford to pay the pricing that sellers promised to merchants and agents before the buyout.
I have to emphasize that all of the concepts discussed in this article flow from negotiations between parties. The possible rights described herein may not apply to your particular relationship, and this article should not be interpreted necessarily as a statement of industry custom.
But the more thought and attention you give to these possibilities, the better prepared you will be to weather a portability event in your portfolio.
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, email Adam Atlas, Attorney at Law, at atlas@adamatlas.com or call him at 514-842-0886.
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