Are You at Risk?
If you are a “feet on the street” sales agent or a no-risk ISO, the common understanding in the industry is that unless you do something bad like commit fraud, you do not have any exposure to pay for merchant losses like chargebacks. The fact is that under the typical agent agreement or “no-risk” ISO agreement, you can be held liable for merchant losses under more innocent circumstances as will be explained below.
What is Risk?
To start with, we need to define the risk that we are talking about. The risk that we are discussing is the risk of losses due to a merchant failing to pay chargebacks, fines, fees and other amounts that the merchant owes under its respective merchant agreement. If merchants do not pay these merchant losses, then the next entity in the chain that agrees to accept the risk of those losses has to pay them. That next person in the chain is usually the full service ISO that is underwriting the merchants and monitoring the merchants’ transactions to lower the risk of chargebacks. But, what if you are just a regular sales agent or a “no-risk” ISO, could you end out having to pay for such merchant losses? The answer might surprise you.
What does the typical ISO or agent agreement say about this subject? Many agreements say nothing about who bears the risk of merchant losses which in and of itself is a problem if you are the agent or no-risk ISO. But in those that do address the issue, most agreements say something like that you are only liable for chargebacks if you commit fraud, intentional misconduct or gross negligence. The main thing to remember about all those definitions is that they generally require you to do an intentional act that you know likely could cause a merchant loss and despite the risk, you go ahead with the action anyway. So, in those circumstances you have a pretty good idea of the risk you are taking. However, there are other contract provisions that could make you liable for losses without any intentional act on your part as further explained below.
In nearly every agent and ISO agreement, there are indemnity provisions that could serve to increase your exposure to pay for merchant losses. An indemnity provision typical states something along the lines that you have to indemnify and hold harmless your upstream credit card processor for certain damages and then lists the circumstances under which you have to pay. Examples of such events that could trigger the liability of a sales agent or no risk ISO are things like your negligence, breach of any laws or in some cases, simply any act or omission on your part, no matter how trivial. How do these indemnity provisions serve to increase your exposure?
The indemnity provisions are a separate way for a sales agent or no-risk ISO to be held liable for merchant losses. The indemnity provisions can be used to hold you liable for merchant losses even if elsewhere in the agreement it states you have to pay such losses if caused by your fraud. The point is that unless the two sections of the agreement are somehow linked, the indemnity provision serve to provide an alternate way for you to be held liable for merchant losses caused by any conduct on your part, not just if you commit fraud or some other intentional act. The fact that there is another section in the agreement that states you pay for merchant losses caused by your fraud does not mean that is the only way you can be held liable for merchant losses under the agreement.
How to Solve the Problem:
So what it the solution if you are a sales agent or no-risk ISO to make sure you only have to pay in the event you commit fraud or some other type of intentional act? There are two main things you can do to fix that problem. First, you have to make sure that you have a provision in the agreement that states you only have to pay for the merchant losses caused by your fraud or other intentional misconduct. Second, you need to modify the indemnity provisions in the agreement so that those provisions do not apply to merchant losses. The best way to do that is to actually state in the beginning of the indemnity section that your liability for merchant losses does not apply unless such losses are caused by your fraud or other intentional act. That way, you can be sure that you will not be liable to pay for merchant losses under the indemnity provisions.
As you can see, being a no-risk ISO or sales agent may not be as safe as you think. There are many ways to be held liable for merchant losses, chargebacks and fees under a sales agent or ISO agreement. But, you can substantially reduce that risk if you take the steps outlined above and become a true “no risk” partner in the relationship.
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.