Sales Agent and ISO Residual Disputes

Sales agents and ISOs depend on residual payments generated by the merchants they refer. A missed or reduced payment may reflect omitted merchant revenue, an unsupported adjustment, a claimed default, or the transfer of merchant accounts.

Rome LLP represents sales agents and ISOs in residual and portfolio disputes. The firm obtained a jury verdict of more than $16 million in a case involving residuals on nearly $300 million in annual processing volume.

Residual Calculations and Reporting

The referral agreement and compensation schedule establish the residual formula. Residuals are generally calculated by applying the agreed split to net revenue generated by referred merchants after the specified costs.

Residual payments are accompanied by reports showing how the amount was calculated. The level of detail varies widely. Some reports identify each merchant, the revenue attributed to the account, and the costs used to determine net compensation. Others show only portfolio-level totals, making it difficult to verify that all referred merchants were included and the agreed buy rates, costs, and compensation split were applied.

When compensation is based on revenue received by the ISO, reports from the processor or acquiring bank may also be needed. Comparing those reports with the residual statement can reveal omitted merchant revenue or inputs that do not match the contractual formula.

Suspension and Post-Termination Residuals

The referral agreement determines whether residuals continue after termination. Some agreements require payment for as long as referred merchants continue processing. Others permit a cutoff after a defined event of default or when the agent fails to meet specified minimums or stops performing required services.

The agreement may permit residuals to be withheld temporarily while a suspected breach is investigated. Permanent termination requires separate contractual authority and facts satisfying the applicable default provision. Any notice and cure requirements must also be met.

When the asserted default concerns merchant referrals, the alleged breach may involve inaccurate application information, misrepresentations about the merchant’s business, improper MCC coding, or referrals prohibited by the agreement or applicable credit policy. Whether that conduct justifies terminating residuals depends on what the agent or ISO submitted, what the ISO or acquiring bank approved, and whether the ISO continued receiving revenue from those merchants after the issue was identified.

Merchant Diversion and Account Migration

Residual disputes arise when revenue from a referred merchant is no longer credited to the agent even though the same business continues processing. The merchant may have been reboarded under a new account, moved to another platform, or continued processing under a different business name.

The referral agreement may tie compensation to a particular merchant account or to the referred merchant relationship more broadly. Industry practice may help interpret an ambiguous provision. Separate claims may arise when a party uses misrepresentations, confidential merchant information, or other wrongful means to divert the merchant or interfere with the agent’s contractual right to residuals.

Portfolio Sales, Residual Assignments, and ISO Sales

When an ISO sells all or part of its merchant portfolio, the agreement may require the buyer to assume the residual obligation or the seller to fund a buyout. The amount owed depends on which referred merchants were included and how the agent’s residual interest was valued.

An agent may separately sell or assign its residual rights. The agreement may require the ISO’s consent, give the ISO a right of first refusal, or require the purchaser to assume the agent’s continuing obligations. The transfer may convey only the payment stream or may also bind the purchaser to the agent’s contractual obligations.

A sale of the ISO may trigger change-of-control, buyout, or tag-along provisions. Where the buyout tracks the sale, the agent’s payment may be calculated from its average monthly residual using the same valuation multiple paid for the ISO. Disputes may concern whether the transaction triggered the provision, which averaging period controls, and whether the correct multiple was disclosed.

Deductions and Setoff

The agreement may permit the ISO to claw back compensation paid on revenue that was never collected or was later refunded or reversed. It may also allow the ISO to deduct specified merchant losses from future residuals or set off damages caused by the agent’s breach.

To support the charge, the ISO should identify the merchant or event that generated the loss, explain the amount claimed, and identify the provision authorizing the charge against residuals. A portfolio-level adjustment without that detail cannot be verified.

Valuing the Residual Stream

Past-due residuals can be calculated from merchant-level reports and the compensation schedule. Future damages may be based on a contractual buyout or the present value of residuals the agent would have received.

That value may depend on recent payment history, merchant attrition, how long the merchants were likely to continue processing, and any valuation multiple specified in the agreement or transaction.

Residual Dispute Representation

Rome LLP represents sales agents and ISOs on both sides of residual disputes. We handle claims involving unpaid compensation, suspension or termination of residuals, merchant diversion, and transactions affecting the residual stream. Representation extends from pre-suit demands through arbitration and litigation.

Rome LLP also drafts and negotiates sales-agent and referral agreements governing residual compensation, assignments, and buyouts.