ever sign an ISO deal unless you know exactly how your reserve account will be calculated. I have written about reserve accounts before, but I wanted to address them again. I recently learned that some processors have turned the reserve account into what I believe is an unreasonable cash grab from ISOs.

This is an important issue not just because you will have to get the reserve account back sometime after termination, but also because it is usually funded from your residuals. The best way to explain this is by using a hypothetical example.

Imagine two ISOs: ISO-A, an ISO of Fair Processor, and ISO-B, an ISO of Unfair Processor. Both ISO-A and ISO-B sign their ISO deals at the same time. They also sign the same volume, which is about 100 deals per month.

Both Fair Processor and Unfair Processor tell their ISOs that they will maintain a reserve account of 3% of the monthly volume. Not wanting to pay too much attention to details, neither ISO asks its respective processor for the meaning of "3% of the monthly volume."

After a few months ISO-A and ISO-B each are starting to come close to their monthly goals and some real residual income. They both believe that they are in exactly the same position.

They decide to go for a beer and compare residual statements. ISO-A boasts 150 signed merchants. ISO-B, coincidentally, has signed the same amount. They are very proud of their initial success. But then, the following dialogue occurs between them:

A: "Did you have to fund your reserve account when you started up?"

B: "Yeah, I gave Unfair Processor 10 grand."

A: "Same here, but at least Fair Processor isn't skimming off each of my residual checks to fund the 'reserve account.'"

B: "You mean Fair Processor doesn't take money from each residual check for the reserve account?"

A: "Of course not. Once the reserve account reaches 3% of the monthly processing volume, then Fair Processor stops taking my money to build that account. Why should it keep taking money when it doesn't need it? Its name is Fair after all."

B: "Unfair Processor takes 3% of every check it writes to me and puts it in the reserve account. ... Waitress? Please bring us a pitcher."

A: "Let me get this straight. Say you have a monthly residual check of 10 grand for 10 years. The processor will take 3% of every check for 10 years? Are you serious? Man, it sounds like Unfair is living up to its name."

B: "Wait a second. Let's say you sign up 5,000 merchants with Fair Processor, and their volume is $10,000,000 a month, and that volume stays stable. You say that once the reserve account is built up to 3% of $10,000,000, it will stop dinging you for reserve funding?"

A: "Yeah, as long as the volume stays level, once the reserve account is funded I stop paying into it."

B: "Man, your deal is sooo much better than mine. I just keep on paying, rain or shine. My reserve account could go to a billion dollars, and I'd still be paying into it 3% of every check. Wow, I have to talk to my relationship manger at Unfair."

A: "When you are done with that, call your therapist. Hehehe."

B: "I would, but my spare cash is all tied up in my reserve account."

ISO-A and ISO-B finished the pitcher, but ISO-B went home 3% unhappier than ISO-A.

The moral of the story, folks, is that reserve accounts for ISOs are calculated in different ways. You will never get around the requirement for having a reserve account. It is necessary for the processor and the bank to protect themselves from liability. There are, however, different ways to calculate the amount that goes into the account. Spend some time talking to your processor about how it makes these calculations.

If your processor calculates the reserve account in a way similar to Unfair Processor, this does not mean you should not sign a deal with it. You should, however, look at that point in the deal and weigh it against all the others. Shop around a bit and find one that is right for you.

Making an ISO deal isn't hard. Getting the deal you think is written down in a clear and fair agreement is very hard and deserves your attention. Many processors are very up front and straightforward about how things work. Some are not, though.

This is why I chose to discuss this topic. I want to make sure readers sign the deals that they think they are signing. Whatever you do in this business, take time to discuss it with someone with a little more experience than you, so that you wind up as happy as possible at the end of the day.

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.