Agent Agreement Essentials
So you are new to the industry and get your first agent agreement sent to you. But what in the world do you focus on in that bewildering document full of acronyms that you have never seen before to make sure you are rights are protected. Below I will focus on some of the most important things that you should ensure are included in the agent agreement.
Right of First Refusal:
To plan for the future, you want to be able to have the right to sell your residuals to a third party other than the processor. You never know if you will want to cash out and sell your residuals but you want to make sure you have that right. Most reputable processors will allow you to do this but also will expect that you will give them the right of first refusal on any such sale. That means you go out and get your best offer for your residuals and the processor has the right to purchase the residuals at that price. It is standard for the industry so do not worry if your processor insists on such a right but make sure you ask for the right to sell your residuals to a third party in the first place.
An important thing is to make sure of is that the agreement is not exclusive and does not give the processor a right of first refusal on all the business that you originate. Although for the last 15 years of so, it has been standard for agent agreements to be non-exclusive, probably half the agreements I see still have some form of exclusivity or a right of first refusal in them. And you would be surprised how many people will just sign whatever is put in front of them and later regret it. Make sure to insert language in the agreement that makes it clear that you can work with whomever else you want to in your sole discretion.
You want to ensure that the agreement states that it is a “no risk” type of relationship, as it is called in the industry. By that I mean that you as a sales agent do not want to bear any risk for merchant losses such as chargebacks and fees that the merchant does not pay. It is standard in the industry that as a sales agent you should not be liable for such losses. It is fair that you should not get paid compensation on the individual merchant if there are losses, but you should not be held liable for any such losses that you did not cause.
Another important thing to be aware of is that processors often reserve the right to change your base pricing that is used to calculate your compensation. That type of provision was originally used because interchange rates change regularly and those cost increases have to be passed on to the sales agents by the processors. But many processors have taken advantage of those types of provisions to increase your fees.
Issues arise when the processor marks up increases in things such as interchange, to pad in some more profit for the processor at the expense of the sales agent. Also, processor have been known to add on fees that are not pass through of third party costs increases but really have been added to again shift part of the profits derived from the merchants from the sales agents to the processors.
In order to avoid this issue, you need to ask for a provision in the agreement that states the processor can only pass through increases in the third party costs charged to the processor by its vendors without any markup. In addition, you want to make clear that the processor cannot just add fees that do not reflect costs they are being charged by their vendors. Only then will you be free from the possibility of losing part of your income to processors that are inclined to add fees to your buy rates.
Right to Get Paid All Revenue:
Many people say you get X% of the profits from the merchants but what does that really mean? For instance, one processor might pay you a higher percentage, but pay you nothing on PCI fees. So it becomes hard to compare different programs just based on the percentage of the profits you are getting paid.
To ensure that you are comparing apples to apples, you should ask that you be paid on all revenue that comes in from the merchants. It is a good way to make the different programs more transparent and comparable. Also, it is a good way to find out if you are getting paid on all revenue streams derived from the merchants. If you ask for such a provision in an agent agreement and the processor objects to it, then you can explore what revenue streams they do not share in the same percentage as your overall compensation percentage. This gives you the ability to see which programs really pay you the best as far as residuals go.
Prevailing Party Attorney’s Fees:
If you ever have to sue your processor for wrongfully terminating your residuals, you will want to have all the leverage you can. To that end, make sure that there is a provision in the agreement that states in any litigation or arbitration, that the winner gets to collect its attorney’s fees from the losing party. That way, if you are suing your processor that decided to turn off your residuals just because they can, you will have the additional advantage if you win, that the processor will arguably have to pay all the attorney’s fees you incur for suing the processor. This will put additional pressure on the processor to settle that case as the attorneys bills increase.
Protection for Your Residuals:
Last but most important, is making sure that your right to get paid residuals is protected and goes on forever. Most agent agreements initially allow for the processor to terminate the residual payment of a sales agent for any trivial breach of the agreement, without any right to notice of why the residuals are being terminated and any right to cure the breach.
So, the first thing to do, is to make sure you have a right to get notice of whatever the breach is that is potentially going to cause you to lose your residuals. This forces the processor to state a clear reason why the residuals are being terminated. That way, they cannot come back at a later date and manufacture other reasons for you to lose your residuals. You then need to make sure that you have the right to cure the breach once you have received notice of what it is.
Finally, you want to try to narrow the reasons for which your residuals can be terminated. By this I mean only material reasons such as moving merchants or committing fraud, should trigger the loss of your residuals. By ensuring that termination occurs only due to a breach of the material provisions of the agreement, you can protect yourself from losing your residuals for some trivial matter.
The provisions above should give you a good starting point in ensuring you have a good agent agreement. But be sure you carefully review the entire agreement to find all the potential pitfalls that might end out causing you harm.
The information contained herein is for informational purposes only and should not be relied upon in reaching a conclusion in a particular area. The legal principles discussed herein were accurate at the time this article was authored but are subject to change. Please consult an attorney before making a decision using only the information provided in this article.