As competition for clients intensifies and margins grow increasingly thin, many ISOs are seeking ways to reduce costs, increase efficiency and stand out from competitors. One method gaining consideration is the use of digital signatures and contracts.
Some observers express concern about the potential legal pitfalls and problems that may occur should an ISO's acquiring bank or processor not approve of digital contracts and signatures. But backers say they can reduce how long it takes ISOs and agents to process merchant applications, decrease the amount of paperwork required for new accounts and cut costs.
"I personally believe that a few years from now paper will be the exception in signing up merchants," says Adam Atlas, a Montreal-based attorney with Adam Atlas Attorney at Law. "How we are going to get from where we are now to where I think we will be somewhere down the road is really the challenge" because of possible opportunities for fraud that may arise from using digital contracts, he says.
Merchant-service providers overall have been slow to adopt digital contracts because often ISOs and agents are too busy growing their own businesses with the tools they have to explore new technology, says Atlas.
The method a merchant follows to complete the digital application varies by vendor. Those companies that have embraced the technology typically find it increases the speed with which they process merchant applications.
"We automated the process of getting an application not only from the merchant but cleared through underwriting," says Mike Cottrell, vice president of business development at TriSource Solutions LLC, a Bettendorf, Iowa-based merchant-processing provider and ISO.
One of the biggest issues for TriSource's agents and ISO partners is getting merchants to fill out the contracts and fax them back to the company, says Cottrell. "We looked at it and said, 'If we can speed up that process, making it easy to sign with a digital signature, we've got a good start,'" he says.
Though some agents that work for TriSource prefer to have merchants fill out paper applications, others with laptops and wireless Internet connections send the application information to merchants immediately during a meeting and complete it with them digitally onsite, says Cottrell. "It's where the future is heading," he says.
POTENTIAL BENEFITS
ISOs benefit from using online merchant-account applications instead of the traditional paper-based process because it reduces not only the amount of time it takes to process a contract but also the potential for errors, note some observers.
Switching to electronic contracts from paper-based ones can reduce an ISO's sales cycle from 14 days to two days, says Warren Owens, the executive vice president of sales for ContractPal Inc., a Lindon, Utah-based company that provides online application forms with electronic signatures for documents.
"ContractPal's Web-based electronic application systems reduce cycle times by ensuring the merchant completes the application form right the first time," says Eric Thomson, managing director of Profit Source Advisors LLC, a Palo Alto, Calif.-based consultancy. Profit Source has a sales and business-development relationship with ContractPal.
With ContractPal, a sales agent initiates the process by opening a new contract and adding the client's information. ContractPal then sends the customer an e-mail that includes a link to ContractPal's website. The merchant logs in to the site to view the contract and can make changes and enter information as necessary.
The system indicates the areas where a merchant must sign digitally by displaying buttons that say "sign" or "reject." A merchant can use the "reject" button if it chooses not to sign in the indicated area.
ContractPal ensures all necessary fields are completed before a merchant can submit the contract back to the agent. The system records who signed, the date and time of the signature, the Internet protocol address of the computer used to sign the document, and a unique transaction-identification number. An Internet protocol address is a number assigned to a device that is participating in a computer network.
Once the merchant completes the contract, ContractPal alerts the agent that the contract is ready for the agent to review and sign.
The paper-based process typically involves a merchant receiving a paper contract, filling out the necessary information and faxing it to the ISO, says Tom Gonser, founder and vice president of product strategy for DocuSign Inc., a Seattle-based provider of electronic-signature services.
Mistakes can occur during the traditional process, says Gonser. "Maybe [the merchant] filled out the wrong boxes. Maybe they missed filling out a page," he says.
Some potential clients also may change their minds in the time between the handshake agreement with the agent and when the client receives the contract, says Gonser. A day or two often may pass between when the merchant receives the contract and when it signs it. "That's typically with a lot of business transactions," he says.
With DocuSign's electronic process, the company sends an e-mail to new clients that informs them the sales agent with which they are doing business would like them to fill out and sign a document digitally, says Gonser. The client clicks on a link in the e-mail and is directed to a Web page that displays a graphic representation of the person's signature but not an exact replication. The representation serves as a substitute for a physical signature that the client must accept as his or her digital signature, he says. Clients also have the option of uploading a scanned version of their physical signatures.
Once clients accept the digital signature, they can view their contracts on the computer screen, says Gonser. Tags indicate where the client needs to "sign," and the client can leave a digital signature by clicking on the areas indicated by the tags. Once finished, the client can print a copy of the contract for the company's records, save it to a company computer or store the contract electronically with DocuSign, he says.
Digital contracts are "an inexpensive way to really speed up the gathering and processing of information," says Cottrell, noting he uses ContractPal's electronic-document services.
The costs for ISOs also can decrease from roughly $45 per paper contract to roughly $10 per digital contract, says Owens. Paper contracts cost more because of the printing, ink, paper and storage costs associated with them, he says. Companies also must pay employees to enter data printed on the physical contracts into computer systems.
TriSource pays roughly $5 per electronic application, says Cottrell. "Initially we said we don't want to pay $5 for an application to come in. Then we saw that 15% of applications that were faxed to use were incomplete," he says.
For each incomplete application, the ISO has to use employee time to review the contract, inform the sales agent it is incomplete and have the agent gather the missing information from the merchant, he says. "We looked at it as a cost savings on the data-entry side as far as incomplete applications. That alone is worth more than $5," says Cottrell, noting the company spends three to four times that amount to finalize an incomplete contract.
POTENTIAL PITFALLS
While an ISO may realize benefits from using digital signatures and contracts, adopting a technology not widely used in the payments industry can be difficult. Potential legal difficulties exist, and not all processors and sponsor banks may approve of digital contracts, note observers.
Regardless of the method ISOs use or third party with which they contract for digital contracts and signatures, they should ensure it complies with the federal Electronic Signatures in Global and National Commerce Act, says Stephen A. Aschettino, president and attorney at law at Aschettino Law PC, a New York-based law firm.
Additionally, each state has its own commerce law, and all states but New York, Illinois and Washington have adopted the Uniform Electronic Transactions Act, which governs the validity of electronic signatures and record retention, says Aschettino.
ISOs also should review carefully the service agreement they enter into with third-party providers of electronic-document services. "They will have a number of disclaimers, and you have to look at what they will indemnify you for," says Aschettino. "You have to be careful what you are bargaining for and who you are bargaining with."
Ultimately, the decision on whether to use electronic contracts for ISOs centers on risk versus reward, says Paul A. Rianda, who operates his own law firm in Irvine, Calif. "I encourage my clients to set a threshold [amount for how much in electronic funds merchants process] if they are going to do electronic means," says Rianda.
If a merchant is completing $10,000 per month in card transactions, it is not a large risk to the ISO if the contract is unenforceable, he says. An ISO may want to obtain a physical signature or valid electronic signature for a merchant processing $50,000 or more each month, he says, noting not all forms of electronic signatures are valid.
One of the issues surrounding digital documents is how to accurately authenticate the persons "signing" the contract are who they claim to be, says Rianda. "How do you authenticate the person that is on the other end of the computer?" he asks.
Some electronic-document companies provide authentication services that ensure the correct client is approving the contract, says Atlas.
Indeed, DocuSign uses phone-based or knowledge-based authentication methods, says Gonser. "These are tools that make sure it's me and not someone else at my computer," he says.
For instance, DocuSign can provide clients with access codes they must input to digitally sign the document. "Someone who tried to sign [the contract] would need to know that code," he says.
ADOPTION CONCERNS
Aschettino theorizes there has not been much uptake among ISOs of digital contract technology because processors and sponsor banks are concerned about it. "I have seen a reluctance of the processors to accept documents like that. They prefer to see hard, signed documents," he says.
Adoption of the technology will have to "trickle down," says Aschettino. ISOs may want to use digital contracts, but first the processors and sponsor banks need to approve, he says, recommending that ISOs interested in adopting digital contracts first speak with their processors and banks.
TriSource's sponsor bank, Merrick Bank Corp., initially was "concerned" with digital documents and signatures, says Cottrell. The ISO worked with the Draper, Utah-based bank and its legal group to ensure everyone approved of the process, he says.
Some merchants also may balk at signing documents digitally, says Aschettino. "The problem might be in this industry you have your sophisticated merchants, but the bulk of merchants out there are mom-and-pop companies that don't want to deal with electronic documents," he says, noting many businesspeople are more comfortable signing traditional paper documents.
TriSource, however, has encountered little difficulty convincing clients in its merchant base to sign digital contracts, says Cottrell. "Most merchants like it. They find it easy and fast," he says, noting only a few merchants felt uncomfortable with the process.
Digital contracts and signatures have the potential to speed up the sales process. However, few merchant-service providers have embraced the technology, and adoption among all industry players likely must occur before ISOs widely adopt it.
From the May/June issue of ISO&Agent magazine.
