Finding an effective partner has long been one of the most challenging aspects of the payments business for both ISOs and sales agents. ISOs tend to look for agents who can be immediate, prolific revenue producers, and agents seek out ISO partners who treat them fairly and provide healthy margins and reliable residual payments.
For ISOs, the biggest issues include finding agents who fit their market ambition, organizational resources and financial expectations. Some ISOs greatly depend on agent partnerships and sub-ISO relationships for much of their revenue.
Payment Alliance International, which places ATMs and provides other services, has about 30,000 merchant accounts. Agents account for about two-thirds of the company’s business, says Don Apgar, the Louisville, Ky.-based ISO’s senior vice president of national sales.
The ISO uses what might be described as a cautiously open-minded approach to bring new agents into the fold. “The only hard requirement that we have for partners is we do a credit check and a background check on everyone that comes through the door,” says Apgar, who advises other ISOs do the same.
In today’s market, ISOs do not need a team of detectives and intelligence analysts to conduct background checks. It can be relatively inexpensive, in fact, with background reports available from online services that cost from about $20 to $50, according to a Google search by ISO&Agent.
Beyond the background check, Payment Alliance does not make agents jump through too many hoops to get started. The ISO does not require a minimum number of monthly deals, and in some instances it offers an activation bonus.
“The one thing you need to do as an ISO before you agree to work together is ask yourself if your company is a good fit with that agent,” Apgar says. “Ultimately, if I can’t give you as an agent the tools you need to meet your objective, then neither of us is going to be happy.”
Career Experience
In some cases, an agent’s career experience can go a long way toward determining whether an ISO and agent will be a good fit.
Indeed, some ISOs hunt for only the most experienced agents, while others might be willing to try out agents who have little or no bankcard experience, says Mike McCormack, president of Palma Advisors, in Fort Lauderdale, Fla.-based consulting firm.
Experienced agents might best be found through word of mouth and industry-focused advertising, while ISOs looking for new talent might trying posting jobs on Craigslist or Monster.com that seek some basic general sales experience, he says.
Experienced agents typically hit the ground running, but less experienced agents can come with their own advantages, insiders say.
The ISO can play a stronger hand in developing its deal-closing abilities, and it can bring agents on at contract terms that are more favorable to the ISO. “If your work with new agents, that could certainly affect the terms of the relationship, though you also will need a lot of simplification to the point where they are basically selling happy meals,” McCormack says.
Alpine Payment Systems works with a mix of agents with various levels of experience, says Bob Ensminger, president of the Vancouver, Wash.-based ISO that focuses heavily on pay-at-the-table systems. “We have 50 active agents across the U.S. that do 80% of the merchant accounts for us,” he says. “We also have hundreds of part-time agents. We’ve got a mix of experienced and nonexperienced people, and some who before working with us were mortgage agents.”
Agents new to Alpine get three to four days of classroom training in Vancouver. Once their training is complete, they work with a manager for a short introductory period, and Alpine assigns them a mentor. Alpine also provides the new agents a $3,000 guarantee on their first month representing the ISO. “We feel that helps them ramp things up,” Ensminger says.
An agent looking to establish a new ISO relationship first should look into the ISO’s reputation through Internet searches and by asking others familiar with the company, McCormack says. Once they set foot in the door, they should discuss financial terms–buy rates, revenue splits and residuals, he says.
No standard contract exists between an ISO and agent that contains varying lengths and financial terms throughout the industry. However, Adam Atlas, a Montreal-based attorney working in the payments sector, says the key considerations tend to be fairly consistent from one contract to the next.
One of those issues is pricing. “There are two considerations there–the buy rate and the revenue split,” Atlas says. “The buy rate is when an ISO says to an agent, ‘You can sell processing at, for example, 1.6% (above the ISO’s price), and whatever you get above that is your profit to keep.”
The Revenue Split
The accompanying issue is the revenue split. ISOs might agree to a 50-50 revenue split with the agent, though in some cases the revenue split can change depending on the effectiveness and reputation of the agent.
“We set up deals that meet the needs of the agent,” Apgar says. “We give the best guys a better revenue share.”
At the core of concerns for the agent is how the ISO calculates the figures for buy rates and revenue splits.
“You need to figure out how the ISO computes their buy rate and their net revenue,” McCormack says. “There is no single definition in this industry for what net revenue is, so that makes it very hard.”
A high revenue share may make the contract look favorable to the agent, but the percentage itself does not tell the whole story, Atlas and McCormack both warn.
“If the revenue split is going to be 50%, it’s important for the agent to find out, 50% of what?” says Atlas. “The superstar agent can get high percentages, but you have to think about what goes into that.”
For example, the percentage may not account for security fees or IRS fees, among other possible add-ons, Atlas says. “The processor or the ISO can put whatever charges they want in there, so it’s important to find out what fees apply,” Atlas says.
Similarly, buy-rate calculations may involve extenuating factors, McCormack says. “As an agent, you can negotiate a good commission for yourself and the buy rate might seem manageable, but what if that buy rate is actually too high for you to sign merchants? If it’s too high, the buy rate can destroy your margins. The devil is in the details,” he says.
Viable Relationships
Negotiating financial terms is another instance in which an agent’s background can become a key factor in helping him establish viable relationships. “A lot about the revenue split depends on the experience of the agent,” says Alpine’s Ensminger. “We are fairly open-minded about it if they have a lot of restaurant merchant experience.”
Moreover, “an experienced agent may have some negotiating leverage on the buy rate because ultimately the agent knows the ISO must compete for their business,” consultant McCormack adds.
Once ISOs and agents agree on the basic numbers, agents also should make sure they understand the terms governing their residual payments. The central issue is to understand how and when ISOs can justifiably stop paying residuals to an agent, attorney Atlas says. This can be a source of much disagreement as a partnership evolves if the parties become unhappy with one another, he says.
“When an agent brings a merchant to the ISO, they are hoping for long returns,” Atlas says. “An example of an appropriate time to stop payment is when the agent commits fraud or breaches the Visa/MasterCard rules. Also, if the agent breaks branding rules by using their own name instead of representing the ISO, that could be grounds for stopping payment on residuals.”
Payment Alliance knows how sensitive agents are about their residuals, Apgar says.
“It is important that you try to look at things from the agent perspective,” he says. “Their monthly residual is their income. It’s like the insurance industry. The residual becomes almost like an annuity. They depend on it. It’s important for the ISO to respect that and not stop payments unless there is a really good reason to do so. For us, we’re not going to do that unless you commit fraud or rewrite our business somewhere else.”
It also is important that the agent understands the ISO’s position, Atlas adds. “Usually, if an ISO elects to stop payment to the agent, it’s not because they want to steal from that agent,” he says. “Most agents won’t ever admit to not deserving residuals. It just highlights why these terms need to be spelled out.”
Exclusive Contracts
Determining the revenue and residual complexities involved in an ISO-agent partnership is a big job in itself, but other contractual issues also deserves attention, such as exclusivity, which would be a boon to ISOs and payment processors, insiders say.
“Processors usually push for exclusivity,” Atlas says. “If every payment processor could have their way, they would leave nothing on the table.”
However, agents confident in their ability to close deals across a variety of merchant types and segments may find exclusive arrangements too confining, and ISOs tend to understand this.
Moreover, exclusivity is not as simple as it sounds, Atlas adds. “Agents may have an exclusive relationship with an ISO or a processor, but what do you do if they reject some deals that you bring to them? That agent should be able to place those deals elsewhere.”
Atlas urges his clients not to engage in an exclusive relationship unless it is clear they will be getting some additional benefits in return, such as more attractive buy-rate terms, office supplies or some kind of investment in their business.
Payment Alliance has a couple of instances of exclusive relationships with agents “where our name is on their office almost like a franchise,” but the company primarily engages in nonexclusive partnerships with no minimums, Apgar says. And though the ISO offers agents a standard contract term of three years, it comes with termination rights on both sides, he says.
What are more likely than exclusive relationships, and possibly of more benefit to both ISOs and agents, are “preferred provider relationships,” Atlas says. “As an agent, you give a company right of first refusal for a deal, and if they say no, you can take it elsewhere.”
Right of first refusal is something many ISOs will insist on at the beginning of the relationship, and both parties should construe it as an option of flexibility instead of as some desire to end a relationship, McCormack says.
Apgar says it is generally understood that the merchants an agent brings to an ISO stay with that ISO after the agent is gone. “After a relationship is over, merchant accounts generally will stay with the ISO. Again, it’s like in the insurance industry, and as an agent you are writing an account on behalf of someone else,” he says. “You don’t have ownership of the account. To you, it’s just a revenue stream.”
At the beginning of the contract, some ISOs also may insist on a confidentiality clause that extends well past the life of the contract to keep the agent from coming back to steal that merchant account.
And agents may have more options when it comes to ongoing residuals flowing from that merchant account, according to McCormack. “The agent should look for some ability to exit that relationship that gives them control over what happens to their residuals,” he says. “As an agent, you will want to be able to sell your residual rights to another agent.”
Another issue guiding the evolution of an ISO-agent partnership is the terms of liability.
Charge-Back Concerns
One of the key questions is, what happens if a merchant account generates a high number of charge-backs? Some experienced agents may be adept at managing some level of liability, but this responsibility should fall more squarely on the shoulders of the payment processor or the ISO, Atlas says.
“If someone steals credit cards and uses them at a store, but the store doesn’t know they’re stolen and the transaction gets processed, someone from the acquiring side has to pay for it,” he says. “My advice to agents new to the business who don’t have experience managing liability is, ‘Do not take on liability.’”
Both parties in an ISO/agent partnership have a common need to develop partnerships with some assurances of productivity and protection, but outside forces continue to challenge those relationships.
One of those forces is the ongoing debate over interchange, Apgar says. Interchange-fee lawsuits and legislation have the potential to re-shape the payments market and add tension to relations with merchants.
“There has always been a lot of competition in this industry, and [the interchange-fee issues] created more,” Apgar says. “Competition for merchants has gotten intense, and that competition has moved upstream for agents.”
The potential for fee changes has affected the effectiveness of agents, but it also has created bidding wars for the best in the field.
“Tighter competition for agents may push you as an ISO to offer a higher revenue share than you would in the past,” Apgar says. “You might have to be willing to push the envelope a little to pay more for the best possible partner.”
