By Adam Atlas
Attorney at Law
An ISO's rights are set out in their ISO agreement. As new generations of salespeople and lawyers have taken the reins at large processors, I have seen them encounter some difficulty in understanding these rights and negotiating them with new ISOs.
The purpose of this article is to set out a key set of rights that all ISOs should know about whether or not they have managed to negotiate them with their processor or acquiring bank.
The fundamental consideration for an ISO entering into an ISO agreement is that it will be paid residuals in respect of the merchants that it solicits for the processor or acquiring bank. If the ISO agreement is not explicitly clear about the right of the ISO to receive residual payments, the ISO agreement is lacking a fundamental right that most ISOs expect.
Naturally, each ISO will have a unique matrix of pricing and revenue items that will form the basis of residual calculation. The detail of calculating the residuals is different from the right to have those residuals in the first place. Both are, of course, worthy of scrutiny during the negotiation stage of a contract.
It's important that the amount of residuals not be subject to arbitrary changes by the processor or acquirer. Changes in interchange or other typical pass-through costs are welcome. Those changes, however, are different from the processor or acquirer arbitrarily creating new fees or amending existing fees.
The term "lifetime residuals" has no official meaning, but most ISOs and agents take it to mean the processor will pay residuals to the ISO so long as the ISO is not in material and uncured default under the ISO agreement.
Certain breaches of ISO agreements are often negotiated as "sudden death" clauses that come to bear in the event of an ISO's intentional re-solicitation of merchants that is not remedied, or other forms of intentional and material wrongdoing that are not cured within certain delays.
An ISO should consider all scenarios by which residuals can be terminated under their ISO agreement before signing it. It is best that a trivial breach not put an end to residuals for the ISO.
Confidentiality clauses in ISO agreements should be bilateral. The processor has important information that needs to be protected, but the ISO does as well. For example, information concerning the ISO's employees, agents and referral sources should be characterized as confidential information that the processor cannot use without consent of the ISO.
Occasionally, processors acting in bad faith use the ISO's information concerning employees, agents and referral sources as lead generation data to build their own businesses. The ISO agreement should contain language preventing this.
Some processors will say that they are so big, they cannot possibly prevent themselves from doing business with the many agents and referral sources out in the marketplace. Fair enough. Those processors may be free to engage in broad solicitation, but they should not do so with the unfair advantage of using an ISO's information to harm the ISO.
Every ISO agreement is imbalanced to a degree. In the limitation of liability language, an ISO's liability should not be unlimited. Fraud and other wrongdoing may understandably lead to substantial liability on the part of the ISO. However, ISO liability for merchant losses or fines caused by merchant rule breaches and merchant security breaches should be limited as a function of an ISO's decision on whether or not to assume those higher liabilities.
Historically, most ISOs have not assumed liability for merchant chargebacks, fines and security breaches. However, an ISO with enough underwriting expertise and financial ability can negotiate for it to be liable for these merchant-triggered losses. Even for such an ISO, the acquirer is capable of causing certain kinds of merchant losses for which the ISO should still not be liable.
For example, a processor could double process a given batch of merchant transactions, resulting in chargebacks and other losses, and an ISO should not be liable for that kind of merchant loss even if it is generally liable for merchant losses under the ISO agreement.
Another kind of merchant loss that a processor could cause are losses from the processor applying the wrong descriptor to cardholder statements—a descriptor that is different from the one requested by the merchant or ISO acting for the merchant.
In short, while the relationship between ISO and processor is often imbalanced, this should not result in the ISO being liable for every bad act that could possibly occur.
Reporting concerning ISO residuals is never a simple matter. However, it is normal for an ISO to expect its processor to supply reporting in sufficient detail to allow the ISO to verify that it is being paid correctly. That detail would ideally include the amount paid by each merchant on each transaction, as well as all interchange and other pricing items deducted from those fees collected.
Even the most well-protected ISO relies on its processor for information concerning residuals. That said, the more detail provided by the processor, the greater the ability of the ISO to verify that it has been paid correctly and demand correction of underpayment.
Processors often require the ISO to challenge a residual payment within a limited time, such as 30 days. If reporting to the ISO is incomplete or incorrect, the ISO might be unable to discover an underpayment in a timely manner or might never realize that they had been underpaid, allowing the deadline to come and go.
For this reason, the ISO should advocate for an extension of its delay to question residual payments until such time as it is in receipt of both the payment and complete and accurate reporting relating to the payment.
An ISO agreement balances the obligation of the ISO to generate sales and that of the processor to pay residuals. The best balance in an ISO agreement is achieved by taking into account the specific themes discussed above and negotiating the most suitable and mutually beneficial clauses. 
In publishing The Green Sheet, neither the author nor the publisher are engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. For further information on this article, please contact Adam Atlas, Attorney at Law email: atlas@adamatlas.com, Tel. 514-842-0886.
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