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In a move that could have a bottom-line impact for an untold number of independent sales organizations, First Data Corp. is sending letters to client ISOs notifying them they owe fees to the Atlanta-based processing giant to compensate for shortfalls in processing volumes. While it’s not clear how many such letters First Data has sent, the notices are apparently aimed at ISOs whose volumes in 2009 fell short of minimum levels set by contract. The letters ask recipients to remit sums to First Data equal to the processing fees it would have earned on the shortfall.
The demand letters follow a year in which many ISOs sustained sagging volumes as a result of the tough economy, which saw consumers close up their wallets and many merchants close up shop. “It’s kind of an insult to those of us who survived the downturn,” says the top executive of one ISO that received the letter. “I suspect there’s a ton of ISOs getting hit with minimum-payments letters [because of the recession].” The executive, who asked to remain anonymous, furnished a copy of the letter to Digital Transactions News. The three-page document, dated last month, specifies the ISO’s 2009 volume, compares it to the contractual minimum, and asks for tens of thousands of dollars to make up the resulting shortfall in fees. A spokesperson for First Data says the company will not comment on contractual agreements “for proprietary and confidentiality reasons.”
While volume minimums are commonplace in processing contracts, the long and deep recession seems to have triggered a wave of enforcement letters this year, at least from First Data. “This appears to be a fairly new phenomenon,” notes Paul Martaus, president of Martaus & Associates Inc., a Mountain Home, Ark.-based electronic-payments researcher and consultancy, who recently spoke to several key industry contacts about the matter. “I’ve been doing this a long time, and I’ve never heard of this practice.”
Martaus adds that, according to his contacts, the only processor enforcing minimums so far is First Data. “Everyone I talk to has said they know someone who has received a First Data letter,” he says. Contacted by Digital Transactions News, a spokesperson for First Data competitor Total System Services Inc., which operates Tempe, Ariz.-based TSYS Acquiring Solutions, refused to comment. “My understanding is that this is not typical for us to experience,” says a spokesperson for Global Payments Inc., also in Atlanta. Meanwhile, Dallas-based Chase Paymentech Solutions LLC, another major processor that works through ISOs and other resellers, did not respond to inquiries from Digital Transactions News.
Why First Data alone would enforce contractual minimums remains unclear. Martaus speculates the company may see the tactic as a ready way to raise cash to help meet its debt obligations. Still, while the company was saddled with a mountain of debt at the time of its acquisition in 2007 by Wall Street leveraged-buyout firm Kohlberg Kravis Roberts, much of that debt doesn’t fall due until 2014. And at least some industry analysts say its operations are throwing off enough cash to make interest payments for the next few years or so.
