Whose Fee is It Anyway?
Fee income has become a significant and growing part of the revenue earned from merchants in the bankcard industry. Processors and ISOs continue to charge new and larger PCI compliance, regulatory compliance and other fees to merchants. However, when a new fee is levied, how does the revenue get divided up by the processors and sales agents?
Most of the more recent fees did not exist just a few years ago. So if a fee is added that is not directly addressed in an agent agreement, how does one determine if the sales agent gets any of the revenue derived from the new fee?
The sales agent of course is going to argue that it is entitled to a percentage of any additional fees charged to the merchants. If a new fee of $10 is charged and the sales agent is being paid 70% of the profits, then the sales agent is going to argue it should be paid 70% of the $10 fee or $7. Wait a second says the processor charging the fee, we have costs associated with that fee that we need to offset before you get paid your portion of the profits.
This brings up the question of what costs should be offset to determine the profit for these new fees? Certainly it seems fair that if the processor is being charged fees by a third party, that those fees should be deducted before the agent gets a share of any new fees charged to the merchants. So for instance, there are a number of scanning companies that provide PCI scanning and other related services that processors are allowed to resell to their merchants. That type of directly verifiable third party cost would be deducted, but what about internal costs that the processor incurs, should those be offset also in determining how much profits are derived from a new fee?
Back to the PCI fee example, processors have argued that they have incurred substantial internal costs to comply with the PCI requirements themselves. In addition, processors have had to incur additional costs to administer the PCI compliance programs for their merchants. All the merchants must be informed about the PCI requirements and often must be provided scanning and other services by the processors. The processors also have had to hire more customer service people to service these merchant PCI compliance programs, so is all that expense deducted before the agent is paid a cut?
In reality, processors approach this scenario many different ways. I fielded many calls from sales agents a few years ago initially complaining about PCI fees. When the first processors rolled out the PCI fees, agents were incensed that the merchants were moving on to other providers that did not have such fees. And most of the processors were not paying the sales agent the percentage of the fees that the sales agent was paid on existing profits from the merchants. For the most part, the processors just paid the sales agents a fixed amount that was determined by the processor. But how is that the case?
Most agent agreements were entered into before these fees ever existed, so these new fees are not addressed in the agent agreements. Since the fees are not in the agreement, processors argue that the sales agents are not entitled to any part of the fees at all. Given that sales agent as a group are not shy in letting the processors know they feel they are being financially harmed, most processors chose to pay them at least part of the new fees, but usually a percentage far less than the sales agent is paid under the agent agreement.
Some other processors agreed to pay the sales agents the sales agents’ percentage of the profits as set forth in the applicable agent agreement for the fees. But those processors usually charged both internal and external costs incurred by the processor. So in this instance the processors again captured more of these new fees than they ever would for any existing fees leaving the sales agents crying foul.
A small minority of processors paid the sales agents the revenue derived from the merchants for the new fees less external costs and multiplied by the sales agents percentage paid under the agent agreement.
So how are sales agents supposed to be able to preserve their right to be paid their percentage of these new fees? There are a couple of provisions in the agent agreement to focus on. The first is the description of how the sales agent’s compensation is calculated. The sales agent must insure that the agreement is clear that the sales agent is paid on ALL revenue that is collected from merchants. To do that I usually draft a provisions along the lines of “Sales Agent shall be paid on all revenue derived from the merchants it places under this agreement, including, but not limited to” and I go on to make a list of all the typical fees.
This way if new fees are added the sales agent can assert it should collect those fees. The sales agent can also add that if any fees are added to the merchant agreement, those fees will automatically be added to those revenues that are shared with the sales agent.
Another important provisions to address in regard to this issue, is any provision that deals with changes to the fees that are charged to the sales agent to determine the profits that are split. The interchange rates are constantly changing, as are other third party costs like postage. Agent agreements universally contain a provision that states if third party costs charged to the processor are changed, then those increased costs will be passed on in determining the profits that are shared with the sales agent. Those provisions are fine, but there are often other additions to those provisions that can be more problematic for the sales agent.
Such provisions can also provide that the fees charged to the sales agent can be changed “to reflect changes to the card association rules or applicable laws” or something to that effect. However, the issue to the sales agent in using that language is we are back to that issue of passing on internal costs. If the processors internal costs change as a result of the card association rules changing (think PCI again), such a provisions opens the door for the processor to pass on internal costs, in addition to any third party cost increases. In reviewing an agent agreement, it is critical therefore to identify and eliminate any such provisions. In addition, it never hurts to make sure the agent agreement is clear that internal cost increases are not part of the calculation of the compensation payable to the sales agent.
New fees appear to be here to stay. If you want to get your fair share of them, as you have to be very vigilant or you may end out not getting your rightful share.
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.