Guest Column
If you are a merchant-level sales agent or an ISO that does not assume transaction risk, the prevailing assumption in the industry is that unless a company commits an act such as fraud, it does not need to pay for merchant losses such as charge-backs. The fact is, under a typical agreement, agents and ISOs may be liable for merchant losses under more innocent circumstances than fraud.
The risk at hand involves potential losses caused by a merchant failing to pay charge-backs, fines, fees and other amounts a merchant owes the ISO that processes transactions under the merchant’s processing agreement.
There is a “chain” of liability for such losses that starts with the merchant being liable for the losses. Then there is usually a sales agent that does not take risk, so the risk of those losses moves up the chain to the ISO carrying the risk that is processing for the merchant. So if merchants do not pay the losses, the next entity in the chain that agrees to accept the risk of those losses has to pay them which is, in our example, the ISO that is underwriting the merchant and monitoring its transactions to lower the risk of charge-backs.
Many ISO agreements do not state which entity bears the risk of merchant losses, which is a problem for agents and no-risk ISOs. A no-risk ISO is an ISO that usually just does customer service for its portfolio of merchants. Since the no-risk ISO does not underwrite merchants or monitor transactions to lower the risk of charge-backs, it generally is not liable for charge-backs and other merchant losses.
The ISO agreements that do address the issue of who takes risk typically state that agents and ISOs only are liable for charge-backs if they commit fraud, intentional misconduct or gross negligence. Such agreements generally require ISOs and agents to perform an intentional act that they know likely may cause a merchant loss. Yes, despite the risk, they perform the act anyway. In these circumstances, ISOs and agents have a pretty good idea of the risk they are taking.
However, addition contract provisions may make ISOs and agents liable for losses without any intentional act on their part.
Indemnity Provisions
Nearly every agent and ISO agreement includes indemnity provisions that may increase their exposure to pay for merchant losses. An indemnity provision typical states ISOs and agents have to indemnify and hold harmless their upstream credit card processors for certain damages. Such provisions also typically list the circumstances under which they have to pay.
Events that could trigger the liability of a sales agent or no-risk ISO include negligence, breach of any laws, or, in some cases, simply any act or omission no matter how trivial.
Indemnity provisions are a separate way for risk-ISOs to hold a sales agent or no-risk ISOs liable for merchant losses. Full-risk-ISOs can use indemnity provisions to hold ISOs and agents liable for merchant losses even if elsewhere in the agreement it states they have to pay such losses if caused by fraud.
Unless a sales agent or no-risk ISO somehow links the two sections of the agreement, the indemnity provision can provide an alternate way for risk-ISOs to hold ISOs and agents liable for merchant losses caused by any conduct, not just if they commit fraud or other intentional act. The fact another section exists in the agreement that states no-risk ISOs and agents pay for merchant losses caused by their fraud does not mean that is the only way they can be held liable for merchant losses under the agreement.
There are two actions sales agents and no-risk ISOs can take to ensure they only have to pay in the event they commit fraud or another type of intentional act. First, they should ensure they have a provision in the agreement that states the no-risk ISO or agent only pays for merchant losses caused by their fraud or intentional misconduct.
Second, ISOs and agents need to modify the indemnity provisions in the agreement so that those provisions do not apply to merchant losses. The best way to change the provisions is to state in the beginning of the indemnity section that the ISO or agent liability for merchant losses does not apply unless such losses are caused by their fraud or other intentional act.
There are many ways risk ISOs can hold no-risk ISOs and agents liable for merchant losses, charge-backs and fees under a typical agreement.
However, ISOs and agents can reduce their risk substantially if they take the steps to become a true “no-risk” partner in the relationship.
Paul A. Rianda is an attorney who has specialized in providing legal advice to the bankcard industry for more than 10 years. His e-mail is
The information contained in this column is for informational purposes only and should not be used to reach a conclusion in a particular area.
