Permeated by fraudulent representations and shady sales representatives, Independent Sales Organizations (ISOs) were regarded as bottom-of-the-barrel merchant acquiring businesses just a few short years ago. Established banks refused to do business with them. And payment gateways, third party processors, other intermediaries and e-commerce service providers turned their back on hefty bottom line promises.
CEO of First Atlantic Commerce, Andrea Wilson, said: "Back then, ISOs -- or at least the ones who wanted to place merchants internationally -- were totally unqualified and represented a grouping of merchants that were very high risk and verging on the edge of consumer deception."
The type of merchant referrals included those involved in outbound telemarketing or selling products that were already under investigation by the Federal Trade Commission, and those with charge-back rates of 45 percent or higher, she said.
The risk of getting caught up in an ISO web of fraudulent transaction activity was too high. And reputable providers like FAC refused to go there.
But today, ISOs provide for a huge chunk of merchant business. MasterCard International's Senior Vice President for Acquirer Relations, Gerritt Kerkstra, reported that ISOs account for 60 to 80 percent of merchant signings a year, and those merchants account for 10 to 12 percent of transaction volume. According to MasterCard in a recently released study, these signings are worth $120 billion to $140 billion in payment card gross dollar volume each year.
Questionable ISOs are being weeded out
Some unethical ISOs are being weeded out partly because they employ payment processing platforms with security breaches, said Julie Fergerson, Chairman of Merchant Fraud Squad and Co-Founder & VP of Emerging Technologies for ClearCommerce.
She noted that one of the largest providers to the ISO community for internet payment processing often gets press coverage regarding some security breach and merchants being compromised. "These ISOs do not have the technical savvy to check their technology to ensure it is secure," said Fergerson, noting the banks are now paying attention and shutting down these ISOs or enforcing their underwriting policies.
Also effective in stamping out unethical ISOs are Visa and MasterCard's more aggressive risk management policies, according to Wilson. Indeed. Last year, Visa revised its operating regulations and required that members perform due diligence on ISOs and other third party agents to comply with certain Visa Risk Standards.
The Federal Trade Commission (FTC) is also helping to flatten corrupt ISOs by cracking down on merchants involved in telemarketing fraud and similar businesses, which are, in fact, the bread and butter of these types of ISOs.
As well, merchants are becoming more educated in the payment processing industry thanks to organizations like the Merchant Fraud Squad (www.MerchantFraudSquad.com), which was created to educate merchants on the pitfalls of online commerce and reduce merchant exposure to fraud in addition to promoting the growth of e-commerce.
So for ISOs, it comes down to a case of survival of the fittest. Fergerson said: "I think our organization has greatly improved merchants' expectations of what they should expect from their banks and/or ISO organizations, and I know many of them have switched to other processing providers."
The ISO image is changing
This very magazine, Transaction World, serves to enhance "the ISO Position in the Marketplace" and no doubt evolved as a result of the growing popularity of ISOs in the payment systems industry, and the quest to foster ethical representation.
The Electronic Transactions Association (ETA) also served to improve the image of ISOs. Formed in 1990 to help develop operating and ethics standards for ISOs, and develop a credible voice within the industry, it has evolved into the leading international trade association serving the needs of organizations offering transaction processing products and services. According to the Association, its purpose is to influence policy within the industry by providing leadership through education, advocacy, and the exchange of information.
Banks have faith in ISOs
Today, prominent financial institutions like Chase Manhattan Bank don't only work with ISOs, but they actually encourage people to form an ISO and contact them through their subsidiary venture, Chase Merchant Ventures, Inc.
According to Chase Merchant Ventures, "As an ISO partner, you will have the benefit of leveraging the strength and buying power of our relationship with First Data, affording you with the most competitive buy rates in the marketplace."
As "your partner in success", the Chase ISO program offers salespeople tremendous support and training including a dedicated Relationship Manager for assistance, complete product and service training for the ISO and its staff/sales team, a full sales operations & support unit, and rapid on time payment of commissions.
Banks have clearly realized the merchant signing potential of ISOs and have thus developed programs to leverage their strength in the industry. At the same time, they are providing support and fostering leadership through education and service training.
Internationally, banks are also searching for qualified, well-regulated ISO relationships. Offshore banks have become more educated and aware of the scams played by corrupt ISOs. Yet they still look to qualified ISOs for merchant signups. It all goes back to "Know Your Customer," noted Wilson. "Unethical ISOs have actually tainted the appetite of offshore banks because they have been burned by them so many times," she said.
"But one of our objectives -- and that of many other offshore providers -- is to ensure that international banks are aware of who the well-regulated ISOs are because the good ones can add a lot of value to that financial institution, and the offshore banks can certainly add value for the merchants."
Regulation and best practices
As the industry continues to evolve, there is much to be done. Following February 2002's seizure of the Texas-based ISO, Certified Merchant Services, by the FTC, regulators are targeting ISOs. In fact, according to analysts, the case of Certified Merchant Services may bring a needed review of business practices to the industry.
But the ISO can screen their agents to ensure that they meet certain criteria. The organization itself needs to provide guidelines. Many industry leaders also believe it is the Card Associations that need to implement and enforce directives for ISOs and other acquiring companies to follow.
MasterCard International held a best-practices forum for ISOs last summer and has plans to hold another forum this summer. The meeting is designed to provide guidelines to ISOs and show them how to comply with regulations when working with acquirers.
So what is required of an ISO to be ethical?
Certainly ISOs have become the dealmakers of the payment business, and today, they have a responsibility to conduct business in a fair and ethical manner.
But apart from the obvious misrepresentation and purposeful deceit, ISOs can also be seen as unethical for aggressiveness, which in sales is often paramount. So where do you draw the line between ethical and unethical?
Good ISOs have quality customers with a good reputation, and they take the time to get to know their customers.
"You need to look at the quality of customer referred by the ISO," said Wilson. "ISOs have a responsibility to validate that what the merchant is selling is legitimate and that there is value in what they are charging for," she said, adding that typically, the larger the ISO organization, the more confidence she has in its ability to effectively screen their customers.
ISOs also need to provide customers with ongoing support in addition to respect with regard to customer privacy issues.