ISO’s Can Do More To Keep Collections On Their Terms

April 03, 2014
Global Legal Team

ISOs make money on merchant processing agreements (“MPA”) and payment processing equipment leases (“Lease”) in limited circumstances.  Generally speaking, ISOs generate income during the boarding stage, through fees, and via residuals during the life of an MPA.  If a merchant fails to process the full term (“Early Termination”) of a Lease or MPA after boarding, then the ISO loses money.  Given that fact, ISOs should first and foremost strive to keep merchants processing.  Unfortunately, this is a lofty ideal, and Early Terminations are common.

An Early Termination can result in a chargeback.  A chargeback means an ISO loses the money they received from boarding the merchant, plus all future residual income.  This wastes the resources the ISO expends in closing a deal.  At this point, the general course of action for an ISO should be to begin collection efforts – including litigation – against the merchant in an effort to recover losses.  The best way for an ISO to retain its collection rights against breaching merchants is to use a contract in addition to the Lease and MPA.

ISOs should require merchants to sign a contract in which the ISO and the merchant are the sole parties (“ISO-Merchant Contract”).  Doing so ensures that the ISO is able to recover any losses caused by a merchant’s Early Termination or breach of the contracts.  Without the merchant making legally-enforceable promises to an ISO, the ISO is left dependent on an assignment of the contractual rights (“Assignment”) from the company it boarded the accounts with (typically the lease holder).  Requesting and receiving an Assignment typically takes time and money.  More importantly, an Assignment can force an ISO to litigate in distant, inconvenient, and unfamiliar court jurisdictions due to a forum selection clause within the contracts.  Without a contract setting collection rights tailored to an ISO’s location and business practices, litigation can become too expensive and burdensome.  Therefore, the ISO would likely avoid litigation, and hence, enforcement of their collection rights.

The ISO-Merchant Contract should include many of the same terms the merchant agrees to within the Lease and MPA.  These terms include the duration of the agreement, early termination fees, forum selection clause, and a personal guarantee by the merchant.  The duration ensures the ISO has rights to early termination fees.  The forum selection clause ensures a favorable forum for litigation.  Lastly, the personal guarantee allows the ISO to hold the business and the individual liable for any breach of the contract.  As such, an ISO-Merchant Contract will solidify and protect an ISO’s rights and remedies.   

There are numerous benefits associated with having an ISO-Merchant contract.  To the contrary, there are few costs.  While an ISO-Merchant contract allows the merchant to sue the ISO, the forum selection clause protects the ISO by guaranteeing a favorable forum.  In conclusion, the benefits of an ISO-Merchant Contract outweigh any potential costs, and ISOs should look to drafting and enforcing these contracts for every merchant.