By Adam Atlas
Attorney at Law
Whether or not ISOs and merchant level salespeople (MLSs) carry liability on their merchant portfolios, it is in every agent's and sales organization's best interest to monitor their merchants to help them avoid liability. At the least, merchant liability can cause ISOs and MLSs to lose residual income on affected merchants and, at most, engage the liability of ISOs to the tune of huge dollar amounts.
The purpose of this column is to highlight a few common sources of merchant liability that ISOs and MLSs can then turn around and educate their merchants on.
In this way, sales professionals can influence merchant behavior to reduce the chances of loss due to liability. Merchants should know that when they abuse their merchant-ISO contracts, they are putting their livelihoods at risk.
It may seem too obvious for print, but ISOs should always make an effort to monitor chargeback activity occurring with merchants in their portfolios. Even if sales organizations are not liable for losses due to chargebacks, monitoring said activity will inform ISOs as to which merchants are problematic and which aren't.
Any merchant that approaches 1 percent in chargebacks (based on the aggregate monthly processing volume) should be considered problematic. ISOs with merchants with that many chargebacks should immediately intervene to assure that chargeback rates are reduced.
It is better that the volume of merchant processing plummets than remains steady but with high chargebacks.
When ISOs intervene with merchants, they should do so in consultation with acquiring processors to make sure all necessary precautions are taken and merchants are guided to a more secure method of business operation.
All processors have had merchants with high chargeback rates. In consequence, processors know how to enable their ISOs to educate merchants on how to reduce chargebacks. Therefore, ISOs should take full advantage of the knowledge their sponsoring processors have gained from experience with chargeback issues.
Furthermore, ISOs and MLSs should never get caught up in the excitement and frenzy of high-volume merchants that generate huge residuals but run too close to the boundary line of acceptable chargeback levels. When ISOs take into consideration the long-term financial and reputational risks associated with high-chargeback merchants, short-term residual gain is not worth the risk.
The temptation is enormous for ISOs to turn a blind eye to problems in merchant applications, or to even sanction the falsification of said applications. ISOs must resist this temptation. What is more, ISOs should take time to review each merchant application to ensure its contents are accurate.
But the information should not only be accurate in terms of what a standard contract should contain but also accurate given the particulars of each individual merchant. Therefore, ISOs should take the time to:
Through these simple investigations and inquiries, ISOs and MLSs will not only acquire a deeper understanding of merchants and establish deeper personal connections with their customers, they will also gain the knowledge and insight necessary to protect themselves against potentially dishonest merchants or merchants likely to cause them liability issues.
Anecdotal evidence suggests the single greatest source of liability in our industry is false information contained in merchant applications. In other words, if every submitted merchant application contained only true information, most of the losses in our industry might be avoided.
Since ISOs are the organizations that sign merchants to merchant contracts, it falls upon ISOs to do their part in sleuthing out troublesome merchants.
If ISO's and MLS's plans are to build portfolios that have value over the long run, then it falls upon sales professionals to take an interest in whether their merchants are providing accurate information to their acquiring banks.
For every merchant doing business legally and above board, there is a corresponding acquirer partner. So, there is no need to try to board a merchant with an acquiring bank that an ISO knows will be a bad fit. If sales relationships require exclusivity, then seek and obtain an express exemption from exclusivity for each merchant that ISOs know will never meet the underwriting guidelines of the acquirer.
Then, find a secondary processing relationship that can accommodate merchants who will likely be rejected by their primary processors.
Whether or not ISOs are liable for losses and fines relating to security breaches at merchant locations is determined by the contracts between ISOs and their sponsoring acquirers. But most ISOs are not liable for security breaches at merchant locations.
Nonetheless, security breaches often result in Visa Inc. and MasterCard WorldWide levying fines large enough to put most small businesses out of business. Given that most merchants are short of credit today, an additional few $100,000 in fines may be enough to bankrupt the average small or medium-sized merchant. Whether or not these fines are fair or justified will be discussed in a future column.
As a matter of routine, ISOs should educate their merchants on the fundamentals of Payment Card Industry (PCI) Data Security Standard compliance.
I am always surprised to learn about merchants who (a) do not know anything about their PCI obligations; and (b) are ignorant of the fact that they are routinely storing cardholder information because of outdated or ineffective POS systems and software.
A plethora of PCI consulting firms exist in the marketplace today; ISOs should get to know a few and consider reselling their services as a way for ISOs to protect their merchants and residuals.
Please forgive me for the following analogy, but ISOs might think of their merchant portfolios as gardens which require ISO and MLS gardeners to do more than just plant the seeds and reap the fruit. Sales organizations also have to prune and weed their gardens to generate the best harvests.
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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