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The Green Sheet Online Edition

May 14, 2012 • Issue 12:05:01

Don't let your processor do this to you

By Adam Atlas
Attorney at Law

I believe there is value in recounting some of the harmful deeds done by processors in the past year and discussing the legal framework of these acts. My purpose is not to rubberneck at the ISO wrecks that sometimes occur because of processor wrong-doing. My objective is to help improve relationships between processors and ISOs.

Sales organizations whose relationships with processors deteriorate are sometimes themselves responsible for the deterioration. ISOs and merchant level salespeople (MLSs) are not all angels, but for the purposes of this article, let's assume that most are.

I've omitted names, geographic locations, etc. in the following real-life examples to protect the identities of those involved.

Giving ISO the tab for underpayment

Suppose a processor underpays a merchant by several thousand dollars a month, so by the end of the year, the merchant has been short-changed by $40,000. When the merchant discovers the underpayment, the merchant is livid. To salvage the merchant relationship, the ISO advances $40,000 to the merchant out of its own pocket.

Then the ISO turns to the processor to discuss reimbursement. The processor refuses to pay. The excuses include:

  • Failure to bring the underpayment to the attention of the processor within the 30-day window for verifying statements
  • The card brand rule prohibition on ISOs dealing in merchant processor funds
  • Differences of opinion as to the underlying reporting supporting the underpayment

The lesson here is to instruct merchants to be vigilant about inspecting their monthly settlements. ISOs and MLSs also have an interest in seeing that merchants are paid correctly every month, so they have a vested interest in helping merchants with this.

Personal grudge influencing business decisions

We all come across, and even work with, people we do not like. This is the natural course of business. That said, some processors have taken personal grudges to a higher level and made assumptions about ISOs that are simply false.

For example, management at a given processor dislikes one if its ISOs. This kind of dislike can arise, for example, when an ISO shows a sudden drop in new merchant referrals. Obsessing over the drop in referrals, management at the processor jumps to conclusions and imagines the ISO is also moving merchants away from the processor in breach of the ISO's nonsolicitation obligations. This kind of false assumption can lead to a stop in residual payments and a subsequent legal battle.

Incidentally, the opposite kind of assumption also occurs. Some well meaning ISOs, who are basically honest themselves, make the false assumption that their MLSs are as honest as they are. In doing so, the ISOs place excessive trust in agents; this can result in damage to the ISO's portfolio that would not have occurred had the ISO been more watchful.

The take-away in these stories is to keep emotion at bay to a certain extent so as to not let it influence business decisions.

Residuals terminated without notice

In a more colorful moment of processor misbehavior, a major processor recently terminated a substantial monthly residual to an ISO without any advance notice or explanation. The ISO sent three demand letters to the processor; there was no reply. One can only speculate as to how a processor could be advised to be this callous in respect of a given ISO.

The legal consideration here is that most ISO agreements require a party to send notice to the other party to an agreement if the other party is in breach of the contract. Depending on the wording of the ISO agreement, failure to send notice of the breach to the ISO may heighten the processor's liability for failing to give the ISO a chance to cure whatever breach may have instigated the nonpayment.

Note, however, that for certain ISO contract breaches, some agreements do not require the processor to provide advance notice or a period to cure the breach before ceasing residual payments.

'Tied selling' of compliance programs

Compliance fees are the flavor of the month in our industry. With the Payment Card Industry (PCI) Data Security Standard (DSS) requirements, the Internal Revenue Service 6050W rule and implementation of regulations under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, everyone in our industry is playing musical chairs with pricing, not knowing if they will be ahead or behind when the music stops.

While PCI DSS compliance and taxpayer identification number matching are either available from third-party providers or easy for certain ISOs to complete themselves, some processors have made it mandatory for ISOs to procure a suite of compliance services for a fixed set of fees. In anti-trust parlance, this might be called "tied selling."

Tied selling is the illegal practice of a company providing a product or service on condition that the customer purchase another service or product from the same company.

Where a processor makes its general services to ISOs conditional on the purchase of other services, such as compliance programs that can be acquired from third parties, the ISOs constrained by these conditions may be victims of illegal tied selling.

Naturally, each case must be evaluated on its individual merits. ISOs shouldn't conclude all processor compliance programs are illegal. Nonetheless, they should query their processors regarding exactly how much choice they are being given in the suite of services offered to them.Building a case for tied selling is difficult and costly. It also requires the ISO to prove that the arrangement had the effect of lessening competition for a given service within a given market. The difficulty of bringing such cases can deter ISOs from pursuing them, but it does not lessen the sting of being subject to wrongful conduct.

Again, ISOs are not all above reproach. That said, given their extraordinary control over payments and reporting, processors should be held to a high standard of ethics in their dealings with ISOs and merchants alike. end of article




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