f I could predict the future, I wouldn't be so busy doing legal work for the merchant acquiring business. With that disclaimer, following is what I expect to see from a legal perspective during 2005.

Consolidation

In our industry, there's a curious blend of the forces of consolidation and divestiture, driven by a number of factors, and I think the merchant acquiring business needs these two forces to stay healthy.

On one hand, there are individual entrepreneurs who start their own ISOs or processing companies in order to build portfolios and sell them off for the highest multiple. On the other hand, there are banks or large processors, some of which are publicly listed, that buy existing portfolios and use economies of scale to earn greater returns on the consolidated portfolios.

While in previous years I've observed a healthy mix of these two forces, I believe that in 2005 we'll see mergers gaining ground. The principal reasons for this trend are the reduced margins and increased barriers to entry faced by new ISO offices.

On a more specific level, the major players such as First Data Corp., JPMorgan Chase & Co. and Bank of America Corp. have probably not fully realized the market share and market power that they now hold in our industry.

Once they get over the mechanics of their recent merchant services acquisitions, we might see them begin to exercise some of their power in the marketplace. It's anybody's guess as to whether that use of market power will be for the good or otherwise.

More Barriers to Entry

Once upon a time anyone could open an ISO office and make a few dollars. Now there are registration rules, fees, financial statements, guarantees and an increasing number of barriers for people who want to get started in this business.

In light of the greater consolidation of acquiring processors and banks, acquirers are in a position to be more selective of their ISO partners. In addition, greater regulation of the financial services sector, partly because of post-9/11 security issues, makes the industry much less of a "Wild West" business and more of a "pinstripes" business. I think that the registration process will become more onerous and costly in 2005.

Unexpected Competition

Competitors will bring the biggest surprises in 2005, such as software providers like Intuit Inc. and Microsoft Corp. breaking new ground in the POS market. For years people have said that a cash register and POS device will merge into a single countertop PC.

I think competition for the traditional POS model will come from three sources: software vendors, PC vendors and online content developers. It will be up to the entrepreneurs in our business to make the more modern IP- and PC-based processing a profit center for the sales offices. All participants in our business should be on the look out for new models and learn how to profit from them.

New Agreements

If 2004 is any indicator, I think 2005 will bring more new agreements for our business. Last year I saw a number of new revisions to standard ISO agreements. Some of the new versions have proved to be reasonable, taking into account the various problems that can arise in an ISO relationship, and others have proved much less reasonable.

There are a lot of old agreements out there that have not changed much in the last five years. Banks, processors and ISOs should revisit their agreements at least once a year to make sure that they are consistent with industry standards and the normal expectations of parties in the business.

The year 2005 will bring more new standard forms of agreements. With renewals come obligations to make sure that the agreements are well drafted and in the interests of all concerned.

Agent Registration

The flavor of the month in ISO deals is agent registration. There are advantages and disadvantages for both ISOs and processors in terms of agent registration. I advise readers to carefully review the clauses concerning agent registration to make sure that they reflect the business deal made. For example, ISO agent registration with the processor will benefit the ISO if the processor agrees to always pay the ISO residuals for referrals made by registered agents. On the other hand, for the less scrupulous processors (of which there are a few), agent registration becomes an easy way for the processor to take agents from an ISO.

The best way for ISOs to protect themselves against these types of unpleasant events is to think carefully about their deals and make sure that the wording of their agreements actually reflects the deals that they've made.

ISOs signing agreements in 2005 should be prepared to negotiate agent registration.

More Litigation

One of the most exciting things to look for this year from a legal perspective is more large-scale litigation in our industry. As we all know, the anti-trust issues in our business serve as the ripe, low hanging fruit for interested litigators.

It's only a matter of time before more of the big anti-trust issues, such as a limited number of card Associations and networks and the secrecy of their binding rules, come before the courts.

In my view, this kind of litigation is very fruitful for our industry. Expect more of it in 2005.

More of the Same

As much as technology and business models evolve in our business, the fundamental importance of having healthy customer and business relations will not disappear.

My advice to readers: Amid the constant change, continue to focus on building strong relationships with customers and business partners.

All the lawyers in the world cannot improve on a healthy business relationship that offers good communication, good faith and trust. Good business is based on being reasonable and having reasonable expectations. To the extent that readers maintain these ideals, I think that they will have an easier time forming and nurturing lasting and profitable relationships.

I wish everyone in the industry an outstanding 2005. I hope it's the best year yet for all of us.

In publishing The Green Sheet, neither the author nor the publisher is 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 by e-mail at atlas@adamatlas.com or by phone at 514-842-0886.