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This article appears in the April 2009 issue of ISO&Agent magazine.
Compensation packages acquirers and processors offer to ISOs and agents vary, which can make comparing prices and revenue challenging when choosing business partners. The lack of industry compensation standards requires ISOs to perform due diligence before entering into contracts to ensure they understand the agreements and are receiving fair compensation, according to industry insiders.
Pricing grids purposefully are complicated to make "shopping around" for better prices difficult, says Adam Atlas, a Montreal-based attorney with Adam Atlas Attorney at Law. "If you shop around to five different processors, you will get five different pricing grids," Atlas says.
To adequately compare rates and evaluate potential business partners, ISOs and agents should understand the aspects to look for in compensation packages and how to evaluate the agreements.
"There's no way to say what's an average" compensation agreement, agrees Curt Hensley, president of CSH Consulting Inc., a Phoenix-based executive-recruitment firm. Packages typically vary based on the types of merchants the ISO or agent targets and on the experience level required for the job and for the agent, he says.
The payments industry overall is tight-lipped about compensation packages. "No one is allowed to tell you their pricing because every single agreement in our industry has a confidentiality clause that prohibits every party from discussing pricing with everyone else," says Atlas.
The confidentiality clauses are an attempt to curb business-intelligence gathering, Atlas says. "Most people scouting prices are trying to learn about other people's pricing models or take business from one another," he says.
The general lack of industry discussion about compensation packages can make understanding them and what constitutes a fair agreement difficult for some ISOs and agents, industry insiders say.
ISOs and agents entering into agreements with acquirers and processors should understand the fine print, says Jill Miller, attorney and counselor with Jaffe Raitt Heuer & Weiss, a Southfield, Mich.-based law firm.
"This is similar to an employment agreement to some degree. It's really how you're going to get paid, and you want to make sure it's very clear to you," Miller says. "Who wants a misunderstanding about how much money they're getting paid?"
Atlas agrees. "A fair number of ISOs, at least at the beginning of their relationship, don't understand themselves where they are making money and where the processor is making money," he says. "It's very complicated."
Examining the fine print of a compensation agreement, performing due diligence to learn about the provider, and negotiating the contract can help ISOs and agents attain fair compensation packages and create profitable business relationships, industry insiders agree.
Two basic pricing models exist for ISOs and agents: revenue shares and buy rates, says Atlas. In a revenue-share contract, the ISO signs a service agreement with a merchant and earns a set percentage of the revenue from the merchant's transactions. In a buy-rate contract, the ISO earns all or a percentage of the revenue from a merchant above a set price established by the acquirer or processor.
Seek Clarity
Though the explanations for pricing models may appear straightforward, "the devil is in the details of the arrangement," says Atlas.
A contract may call for the processor to pay an ISO 50% of the net revenue the processor earns for each merchant the ISO attains as a client. "What does net revenue mean?" asks Atlas. "That will be unique for every single contract," and the pertinent definitions may not be spelled out, he adds.
For instance, a processor may subtract different expenses from the merchant revenue and give the ISO a percentage of the remaining funds.
"I am an advocate for being very clear in contracts as to who is getting paid what," says Atlas. "There are many reasons why contracts are not specific as to what net revenue means."
Besides spelling out what and how an ISO will get paid, a compensation contract should specify the duration of residual payments, note industry insiders.
When entering into an agreement, ISOs should check whether the processor or acquirer will continue to pay residuals if the ISO or agent moves on to sell with a different company, says Miller. If the provider pays "lifetime" or "evergreen" residuals, the ISO should ask whether the residuals will terminate if they drop below a specified dollar amount, she says. Some processors include provisions in their contracts that they will stop paying residuals if the amount drops below a set price because of administrative costs.
North American Bancard retains the right to stop residuals if "the gross residual falls below $50 per month," says Gary Rutledge, chief operating officer of the Troy, Mich.-based ISO and processor.
"If the residual drops below $50, is it reasonable not to pay a person forever? It might be," says Miller. However, everything is negotiable, she says. If the processor says residuals will stop if they drop below $50, "I say 'OK.' But maybe [the ISO] gets to move the merchant" to its current processor, she says.
Before signing a compensation agreement, the ISO should understand the actions that could cause it to lose its residuals, suggests Atlas. "Residuals, if they are going to terminate, should terminate because of some serious breach," he says.
Processors also can include provisions that residuals could be lost if the ISO or agent is in breach of contract. An agent that mistakenly enters an error when filling out a merchant form, such as an incorrect ZIP code, is technically in breach of an ISO agreement because the agent is submitting false information, notes Atlas. In such a situation, however, "the processors when they notice the mistake should inform the ISO, correct it and move on" and not remove residual rights, he says.
An ISO should lose its residual if it knowingly and intentionally falsifies merchant information, such as incorrectly describing an online pharmacy business as an online book store to move a merchant application through the underwriting process faster, says Atlas.
Revenue Reconnaissance
ISOs and agents always should determine what their potential revenue may be within a specific provider's pricing grid before entering into an agreement, advise industry insiders.
ISOs should "take any pricing grid they're being given and analyze it against the typical kind of merchant they are going to sell to," says Atlas. Crunching the numbers themselves, and not relying on the provider to estimate earnings, gives ISOs an understanding of what their revenue will be with a potential contract, he says. "If you don't understand pricing, the chances you'll be taken for a ride are higher," says Atlas.
"You have to look not only at the price but at what you have left at the end of the month when you get your residual check and take out costs," says Joe Natoli, senior executive vice president of ISO sales with Louisville, Ky.-based National Processing Co.
During the turbulent economy, ISOs also should question potential business partners' financial stability, says Aaron Slominski, director of business development with Direct Technology Innovations, a Fort Lauderdale, Fla.-based ISO. "You have to feel comfortable with the people writing the checks," he says.
"It is important to ask questions," agrees Natoli, adding many ISOs are looking for stability in their business partners. ISOs and agents are asking different questions today than they were a year ago" because of the difficult economic environment, he says.
Compensation Agreements
Acquirers and processors rarely set their compensation agreements in stone, and ISOs and agents should negotiate contracts to ensure they fit both companies' business models, agree industry insiders.
"It's like anything-if you don't ask, you won't know," says Miller. "I find the processors are easy to work with, and they want to be fair."
Direct Technology Innovations uses a standard agreement for the foundation of a discussion, says Slominski. Contract points, such as the revenue split and whether there will be an acquisition bonus, are negotiable, he says. "Our contract is a two-way street," says Slominski.
North American Bancard bases negotiations on the "level of commitment" an agent is willing to make to the company, says Rutledge. North American Bancard makes "commitments to its sales partners," he says. "But we also want them to make a commitment to us" regarding how much business they are willing to bring in to the company.
Not all ISOs and agents, however, have the same levels of negotiating power, says Miller.
"A new ISO coming into the industry with no proven record, no sales experience and no grasp of the industry, that particular ISO wouldn't have a lot of negotiating power," Miller says. An ISO with a sales force and industry experience has greater negotiating leverage, she says.
For a novice agent targeting small merchants, a compensation package could be commission only or a 50/50 revenue split, says Hensley. With a few years of experience, an agent could earn a commission on top of a $30,000 or $40,000 base salary, he says.
As ISOs and agents gain more experience, they can renegotiate to gain better terms, says Hensley.
Comparing and attaining fair compensation packages in an industry without standard pricing grids can be challenging. However, by understanding the types of provisions included in compensation agreements, researching potential business partners and engaging in contract negotiations, ISOs and agents can reach profitable agreements with acquirers and processors.
