What’s Your Exposure?
The term “no risk” if often used in the context of describing sales agents (which also includes some ISOs) exposure for paying for merchant chargebacks, fines, fees, automated clearing house (“ACH”) rejects and other losses (collectively referred to herein as “Merchant Losses”). Many people believe that if they are not taking risk that they would never have to pay for any Merchant Losses. The fact is, that many agent agreements that are “no risk” often find ways to hold some agents liable for some Merchant Losses.
Many agent agreements clearly state that the sales agent is not liable for any merchant chargebacks but neglect to mention many other ways that Merchant Losses may be imposed on a no-risk agent. One of the most common of those I have seen is where the “no risk” agent is asked to take risk is for ACH rejects. An ACH reject occurs when the card processor tries to take its fees for processing payments for the merchant out of the merchant’s bank account but the merchant does not have enough money in its bank account to cover the charge. The attempt to take the funds is rejected due to insufficient funds and the card processor is not paid the fees it is owed by the merchant. The card processor, which is taking the risk of Merchant Losses, has to pay the fees instead, unless it can find someone to take that loss. Often times it will look to the agent to take that loss.
So while an agent agreement may not call for a sales agent to be liable for chargebacks there is still liability for ACH rejects. That sounds innocuous enough to many sales agents but it can have a financial impact on the agent. Some card processors just bill their merchants once per month for fees. So where a merchant is large, billing millions a month but then all of a sudden goes out of business, the ACH reject could be huge. If the agent agreement is silent about the issue of ACH rejects, or states the agent bears that loss, it can lead to the agent making considerably less in residuals then it thought.
The key thing for a sales agent to do, is to make sure there is explicit language in the agent agreement that states the agent is not liable for ACH rejects. Not having such language in the agreement could open up a no risk agent for more liability then it bargained for as part of the overall provision on Merchant Losses.
Another issue with ACH rejects involves the timing of residual payments. Many card processors charge their merchants fees and pay their agents based on the assumption that the merchant will pay the card processor. It may be days or even weeks before the ACH reject comes back and by then the card processor has already paid the sales agent residuals on the transactions in question. In that case, even though the no risk agent does not take the risk of ACH rejects, the card processor often will come back and demand that the residuals paid on the assumption the merchant would pay, now have to be paid back by the agent. The agent gets paid residuals one month and then the card processor ends out taking the money back the next month. This can disrupt cash flow for the agent.
As to all Merchant Losses, the sales agent should try to get the agent agreement to include language that only the agent’s fraud or other intentional conduct would allow the card processor to hold the sales agent liable for such Merchant Losses. That way if the agent is complicit with the merchant in defrauding or making misrepresentations to the card processor, it is only fair that the sales agent pay for such Merchant Losses. But, be careful that you remove any reference to negligence as causing the agent to be liable for Merchant Losses. This could allow the agent to be held liable for some inadvertent, non-intentional error that caused Merchant Losses.
Another way that a no-risk agent may be taking more risk then it thought, is due to the indemnity provisions in the agent agreement. Indemnity provisions are another way that sets forth when an agent can be liable to the card processor for certain losses and damages. The indemnity provisions typically state that the sales agent will indemnify and hold harmless the card processor and then lists a bunch of triggering events such as a breach of the agent agreement, the violation of any applicable laws, violation of the card association rules and often negligence on that part of the agent.
Even if you make sure you take out the reference to negligence in the paragraph pertaining to Merchant Losses, you could still be liable for such losses under the indemnity provisions. If the indemnity provisions say the agent has to pay if it is negligent, then these indemnity provisions could serve to undo all the hard work you did getting the word “negligence” removed from the provisions governing Merchant Losses.
Luckily, there is an easy fix to this one also. All you need to do is state in the indemnity provisions that those provisions do not govern as it relates to Merchant Losses. At the beginning of the indemnity provision adding language that states something along the lines of “except for Merchant Losses which will be governed by section” and then name where in the agreement the Merchant Losses are addressed. This will serve to clarify that the indemnity provisions cannot be used to make the agent liable for Merchant Losses caused by the agent’s mere negligence.
If you are a “no-risk” agent you need to understand what that really means. There are a number of ways you could end out taking on more risk that you would like to if you do not carefully review and modify your agent agreement to minimize your potential liability.
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.