The Green Sheet Online Edition

March 22, 2021 • Issue 21:03:02

Residuals - Are you getting a fair shake?

By Elaina Smith
Secure Bancard

If you're an agent selling merchant services, you know you have a variety of ISOs to choose from. The challenge comes in finding an ISO partner that offers best-in-class products and services that meet your merchants' needs, provides the most competitive revenue share and pricing, and shares your core values.

Here, I'll focus on finding an ISO that offers the most competitive revenue share and pricing, so you can maximize your earnings potential.

Terms to know

First, I'll define a few terms since some of them can be used differently depending on which party in the agreement uses them.

• Residuals are the amount paid to you as a commission on the merchant business that you board with the ISO. There are essentially three components to this calculation: total amount billed to the merchants you've boarded (revenue), Schedule A cost, and the revenue split.
• Schedule A is the schedule of costs the ISO is charging you to place a merchant's processing business with them. These costs don't necessarily equal the ISO's costs unless the ISO indicates that your cost is the pass-through cost. Costs, like interchange and assessments, are usually just pass-through costs, meaning they are billing you the same cost that was billed to them by the card brands. However, some ISOs will indicate an item is passthrough but will, in fact, build in some margin for themselves, so monitor this until you establish trust with an ISO. On other items like authorization and chargeback fees, the ISO often builds room for profitability in this schedule, so carefully review and negotiate these.
• Revenue split is the percentage of income you'll be able to keep after deducting your Schedule A costs from the total revenue billed to your merchants. Many agents focus completely on negotiating a higher revenue split and ignore the Schedule A, which is a mistake. The Schedule A cost is just as important as the revenue split.

Also, carefully review and negotiate the agreement itself. Some ISOs require that you board a certain number of deals each month, or maintain a billing or residual minimum on your portfolio. When you don't meet this threshold, your residuals will not be paid. This concept is called vesting. It's important to understand not all ISOs do business this way.

Residuals are paid after the ISO/agent agreement has been signed and the merchant has been billed. That said, it's hard to have control over what's already happened. But here are some things you can do to have some control and oversight over your residuals

• Before agreeing to Schedule A and split, if possible, run the numbers on an existing, similar portfolio and negotiate from there. You'll be able to see whether you can give a little on one cost to negotiate another down—which could mean more earnings for you.
• Re-calculate your residuals using your Schedule A every month. Ideally, find an automated method to do this so you're simply refreshing each month's data. Usually, mistakes aren't intentional, but they can happen. Most agreements contain clauses allowing you to go back only for a limited time if the error is in your favor. It's important to stay on top of verifying the numbers on a timely basis.
• Before entering into a relationship with an ISO, ask to see what type of residual detail they provide. If they don't provide you with enough detail to recalculate your residuals, find a company that will.

You have a choice when entering into an agreement with an ISO. While negotiating your agreement is important, it's also essential to find an ISO partner that meets the needs of your merchants. The most successful, long-term relationships are built on not only shared profits but also shared values and goals. By doing groundwork before entering into a new ISO relationship and setting up a process to regularly review your residuals, you can ensure you are making the most of your sales efforts.

Elaina Smith is the CFO of Secure Bancard, a wholesale ISO based in Alpharetta, Ga. Most recently, she helped develop and implement Pioneer by Settlement Data Systems, an SaaS solution that enables ISOs to run their business more efficiently. She can be reached at elaina.smith@securebancard.com. 

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