In the bankcard industry, there is one question that to this day still has a very complicated answer: who owns the merchant relationships in a portfolio?
The answer isn’t straightforward because there are no clear guidelines in places that apply to all situations. Sometimes a bank might own the relationship, while it could be an ISO in other cases. To better understand how merchant relationships are governed, you need to learn how their agreements are made.
In this article, you’ll learn why merchant relationship ownership can be difficult to ascertain and how this ownership is supposed to work.
The Problem with Merchant Relationships
How payment card processors and banks “own” the merchant relationship often arises as they enter into agreements with ISO’s agents or seek to buy merchant agreements. Merchant relationships are often considered assets when assessing ownership, including processing-related fees, merchant agreements, and merchant contracts. Identifying ownership is important for several reasons; one is identifying who has the right to sell or transfer the assets.
There are no industry-specific rules and guidelines to determine who owns merchant relationships. It is difficult to feel one owns the relationship when multiple connections are possible. The bank may consider itself the owner of all links to merchants who do business with them, such as depositors and borrowers. An ISO or processor is responsible for most of the merchant’s sales and customer relationship management.
As well as providing guidelines for the content of merchant agreements and how liability is allocated between card associations (e.g., Visa and MasterCard), they can also be incorporated into the overall analysis of merchant ownership that will be discussed in the following section, but they do not specify who owns the merchant relationship. In general, bank card networks require, at least for acquirers who belong to the association or network, that they must be parties to the merchant agreement, can assign the merchant agreement to another member, and retain ultimate liability for merchant credit and fraud losses allocated to them, regardless of whether or not the acquiring bank is indemnified.
As a result of the lack of guidance in card association regulations, practitioners and management are left to their own devices. They should begin their ownership analysis by examining all past and current contracts or agreements the merchant has. These agreements include those between processors and ISOs, banks and processors, merchants, and merchant portfolio acquisition agreements. The remaining income streams may be identified in merchant agreements. The next step is to determine the parties’ intention by analyzing what rights and obligations each party has assigned to the other in their respective agreements if ownership (including the right to transfer the merchant agreement or residual stream) is not indicated.
How Merchant Relationships Truly Work
Merchant relationships are owned by whoever has the right to transfer merchants freely between processors or banks, otherwise referred to as “portability.” Determining ownership in the absence of these agreements is essential by determining which party, if any, has the right to transfer the merchants. This right to mobility is undermined or undermined if restrictions are imposed on it. Imagine an ISO wants to demonstrate several of the most common restrictions to a third party to sell certain merchant agreements, which are subject to a processor-ISO agreement. Transferring a merchant arrangement to another Visa member is governed by Visa rules and requires the acquirer’s consent. An ISO cannot terminate a processor arrangement at will. Merchants cannot be converted to the processor’s platform because the processor cannot assist.
The next step is to analyze other indicators that may indicate a party’s interest in the merchant relationship if one or more restrictions do not clarify which party has the authority to transfer merchants. It is important to identify who is responsible for the risks. It is likely that the parties who bear the majority of the associated risk will divide ownership of the merchant agreement.
Several ISOs, including large wholesale ones, may choose to assume ownership rights instead of portability because it is tedious, expensive, and can result in a substantial number of merchants. Regardless of whether a merchant relationship belongs to a card processor, acquiring bank, etc., the ISO can retain the residual stream so long as the merchant remains with that processor. In return for these privileges, the ISO is usually required to continue servicing the merchants and to be held responsible for any actions taken by the third party that begins servicing the merchants.
It may be difficult to determine who is responsible for each aspect of the merchant relationship when many parties assert varying and confusing rights and responsibilities regarding portability, revenue, and risk. Although such decisions should not be documented in a contract, it is still recommended that each party stand by its rights and responsibilities so that there will be no ambiguities in the future, that each party is protected, that expectations are set, and that future problems are avoided.
Unless an industry-wide change is made to how merchant relationship ownership is handled, it’s unlikely that this question will cease to exist. In truth, who owns the relationship will boil down to the specific agreements and contracts made during its initial inception and who has the portability rights over the merchant account.