ISO Acquirer Relations
LET'S ALL GET ALONG
by Gerritt Kerkstra
When it comes to selling payment card programs to small and medium-sized merchants, as well as managing those merchant relationships, many acquiring banks rely on Independent Sales Organizations (ISOs) for help.
An acquirer faces certain risks and it is important to recognize that these exposures increase when acquirers delegate responsibilities to ISOs and when the ISO contractually agrees to assume risk associated with acquiring merchants. These risks fall into three general categories:
Merchant Credit Risk
When a merchant experiences financial trouble or fails, the typical result is a stream of credits or charge-backs that the card association's interchange system debits from the acquirer's account and the acquirer then seeks to deduct from the merchant's deposit account. If that merchant can't cover the charges, the acquirer and ISO both may be exposed to risk. While the acquirer may contractually pass this credit risk to the ISO, in reality, the acquirer remains liable for any loss that exceeds the ISO's capital.
When a merchant establishes a fraudulent account and submits large-ticket transactions using lost or stolen card numbers, the perpetrator may cause a significant loss of funds reimbursements before the acquirer or ISO becomes aware of the problem. Similar liability risks can occur when a legitimate merchant accepts transactions on a lost or stolen card. While ISOs are rarely involved in fraud, lax management of the merchant relationship can lead to missteps that create risk for the acquirer, even when the ISO contractually assumes liability for fraud.
While they comprise only a small minority of the industry, ISOs that engage in dubious business practices such as hidden fees, price-gouging on terminal leases, bait-and-switch pricing and inadequate attention to customer service issues can damage the reputations of acquirers and legitimate ISOs alike.
Roles and Responsibilities
Choosing the right type of ISO to best suit its organizational model and needs is one of the most important steps that an acquirer will take in forming a strong partnership. ISOs can be divided into four major groups, each with a different mix of roles and responsibilities.
Screening Acquirers: A "To Do List" for ISOs
Identifying an acquiring partner that best suits the specific needs of an ISO takes work. Although pricing is an important criteria for the decision, other important factors include:
Evaluate the training programs available and determine the level of support needed to succeed. In general, comprehensive ISO training offers a clear understanding of the payment programs the ISO will sell, how transactions are processed, and the benefits to the merchant. Also, look for training on equipment installation and merchant POS training, customer dispute resolution processes, and ongoing merchant calling and customer service programs.
ISOs rely on residual payments as a primary source of income so it's important to ensure the accuracy and stability of the ISO's residual payments. Acquirers and processors should exhibit corporate stability, as measured by their financial strength, management staff abilities and responsiveness to key concerns, and commitment to the business.
Underwriting and Credit Policies
Although acquirers are responsible for establishing underwriting and credit policies, ISOs play a significant implementation role. ISOs should inquire about approval rates, underwriting policies, and merchant restrictions so that ISO business plans may adhere to the appropriate guidelines.
What to Expect from Your Acquirer
Acquirers employ a thorough screening process to ensure that the ISO is legitimate and financially stable. Therefore, it is important for the ISO to exhibit:
Sound Business Plans
In addition to sound financial statements, an ISO should have a comprehensive business plan, including a clear explanation of its marketing strategy for the geographies and market categories it will target, a sales strategy that provides a "who's who" of the sales team and the layers employed by the ISO, and its business model for maintaining consistent residuals.
Acquirers review ISO's financial statements, balance sheets, cash flow, and income statements. The ISO should demonstrate that it has adequate liquid assets to protect against acquiring or fraud loss. Also, acquirers often obtain Dun & Bradstreet reports, or other reports, to supplement this information for an accurate assessment of the ISO's stability and financial condition.
An acquirer may also assess the ISO's reputation in the industry among terminal leasing companies and merchants, as well as review complaints that may exist at the local Better Business Bureau.
Ongoing ISO Management
The most successful acquirers take steps to continually manage both financial and reputation risks throughout the course of their relationship with an ISO. This requires particular attention in the following areas:
ISOs that take responsibility for this back-end process should demonstrate thorough knowledge of suspicious transaction activities. Their monitoring systems should scrutinize transactions particularly closely during the first few days and weeks of a merchant relationship, when fraud is most likely to occur, and provide prompt reports to the acquirer.
Managing Reputation Risk
Shortly after the ISO brings a new merchant on board, the acquirer may follow up to verify that the merchant is satisfied with the accuracy of its first bill and that the bill is consistent with the pricing described in the agreement. This follow-up also lets the acquirer determine whether the ISO is fulfilling other responsibilities, such as training the merchant in how to screen for fraud and how to use the point-of-sale transaction terminal.
Guarding Against Hidden Charges
Many ISOs provide services, such as terminal leasing, that carry fees that fall outside of the merchant agreement and may not be included in the bill generated by the acquirer. To avoid confusion and frustration among merchants over such charges, acquirers may consider requiring the ISO to disclose, in advance, all fees that it can charge for its acquiring services.
Successful ISO-Acquirer Business Relationships
While controlling risk is the foundation of successful ISO and acquirer relationships, additional factors come into play as well:
In an effort to address a common desire in our research among acquirers and ISOs to enhance the level of communications with constituents in the acquiring community, MasterCard is unveiling a new process for distributing manuals and core information to registered member service providers beginning in the first quarter of 2003. All registrants will automatically receive the account management user manual, MasterCard bylaws and rules, customer interface specifications and security rules, policies and procedures, among other important items.
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