Toomey Law Firm

 These five provisions cause the most issues in an ISO/agent agreement negotiation

ISO/agent agreements are some of the most abundant agreements in the payments industry. These agreements are particularly common because ISOs need performance based sales teams and agents need reliable ISOs with solutions for their merchants. With the possibility of long-term residuals for an agent and the need for an ISO to minimize risks, these five provisions of an ISO/agent agreement are some of the most contested.

Limitation of Liability

            ISOs usually have a limitation of liability in their agent agreements that caps liability for the ISO to either (i) a specific number or (ii) the total of the residuals paid over a set number of prior months. This limitation is intended to help an ISO assess and estimate risk with its agent agreements.

            For agents, this limitation is often a non-starter. Typically, merchants will process for years, which gives the agent an ongoing monthly income. If the agent allows the ISO to limit liability as described above, it effectively means a malicious ISO could stop paying residuals to an agent and keep the residuals for a predetermined payout (the amount in the limitation of liability provision). Due to the profitability of such residuals, an agent does not want to forfeit this ongoing income for a small predetermined amount or just a few months of prior residuals. Thus, this type of provision is usually an issue.

Termination of Residuals

            In order to protect their reputation in a small industry, ISOs often have a provision that allows them to cut ties and terminate an agent’s residual payouts for multiple reasons such as potential financial harm to the ISO, injuring the goodwill of the ISO, or committing a crime. ISOs will try to keep the termination provisions as broad as possible, because it’s hard to predict exactly what type of behavior by an agent will damage an ISO's reputation. Unsurprisingly, agents are not fond of these termination provisions because the residual income is so valuable. Thus, agents will push to remove or at least narrow the scope of the ISO's termination provision.

Non-Solicitation

            ISOs like to keep their merchants for as long as possible. In order to achieve this goal, most ISOs prohibit agents from soliciting merchants to process with another ISO, even if the agent originally brought the merchant to the ISO. These non-solicitation provisions may last three or more years after the termination of the ISO/agent agreement. This presents multiple problems for an agent because once they start boarding merchants with the ISO, they are stuck with that ISO for at least the term of the non-solicitation period. If an agent attempts to solicit a merchant away, an ISO would likely terminate any remaining residuals. In addition to avoiding a threat to existing residuals, agents want to be able to move merchants for better pricing or if the agent grows into an ISO themselves with direct acquiring bank relationships.

Non-Circumvention

            Similar to a non-solicitation, ISOs use non-circumvention provisions to protect their revenue by restricting access to upstream acquiring banks, processors, and vendors. Agents tend to have an issue with these provisions because their goal is to constantly grow. At some point, many agents hope to become large enough to have working relationships with banks and vendors. This type of provision would stunt an agent’s growth.

Exclusivity/Right of First Refusal

            Some ISOs will attempt to have exclusive agents that are forced to run every merchant through the ISO, especially when the ISO has offered the agent competitive pricing. In these situations, exclusive agents can only board elsewhere if the ISO rejects the merchant. However, agents typically try to avoid exclusive arrangements because they often have many solutions for their merchants and do not want their ability to place a merchant slowed down by an ISO, especially when the ISO is unlikely board the merchant but demands the first opportunity with every merchant. The delay caused by an exclusivity provision only hurts the agent’s reputation.

If you have any questions about ISO/agent agreements, don’t hesitate to reach out to Toomey Law Firm!