Negotiating ISO Agreements: Key Tips for Agents & ISOs

Independent Sales Organizations (ISOs) play a central role in the merchant services ecosystem. They solicit merchants, build portfolios, generate residual income streams, and serve as intermediaries between merchants and acquiring banks.

However, ISO–merchant bank agreements are sophisticated commercial contracts that define ownership, compensation, liability exposure, and dispute mechanisms. Courts enforce these agreements strictly according to their plain language.

Accordingly, ISOs must approach these contracts as long-term risk-allocation instruments, not merely referral arrangements.

Before signing a contract with a merchant bank, an ISO should carefully evaluate the following critical issues.

1. Portfolio Ownership and Control

Portfolio ownership is one of the most consequential provisions in any ISO agreement.

In Process Am., Inc. v. Cynergy Holdings, LLC, 839 F.3d 125 (2d Cir. 2016), the U.S. Court of Appeals for the Second Circuit described the ISO’s role:

“Process America is an Independent Sales Organization (“ISO”) that, prior to the termination of their relationship, solicited and referred merchants to Cynergy, a bankcard processor.”

The dispute centered on who owned the merchant portfolio after termination and whether the ISO could transfer or solicit those accounts. The court enforced the contract as written.

The Second Circuit emphasized:

“In interpreting a contract under New York law, words and phrases should be given their plain meaning, and the contract should be construed so as to give full meaning and effect to all of its provisions.”

ISOs must confirm:

• Who owns merchant agreements during the term;
• When ownership vests, if at all;
• Whether the portfolio can be assigned or transferred;
• How termination affects ownership rights.

Ownership provisions directly affect enterprise value and exit strategy.

2. ISO’s Rights Under a Right of First Refusal (ROFR)

Many ISO agreements grant the acquiring bank a Right of First Refusal (ROFR) over the ISO’s portfolio or a proposed sale transaction.

A ROFR gives the holder a preemptive right to match a bona fide third-party offer before the ISO may complete a transfer. Because it restricts transferability, courts interpret ROFR clauses narrowly and strictly according to their text. See Kaiser v. Bowlen, 455 F.3d 1197 (10th Cir. 2006).

The Exercise Period and Procedures Must Be Expressly Defined

There is no statutory default exercise period. The enforceability of a ROFR depends entirely on the contractual language.

The agreement must clearly define:

• The duration of the exercise period (in calendar days);
• The triggering event (such as receipt of a bona fide written offer);
• Notice requirements and delivery method;
• That failure to respond within the stated period constitutes waiver.

Courts have limited or invalidated ROFR provisions where essential terms were missing or indefinite. See Mr. W Fireworks, Inc. v. NRZ Inv. Group, LLC, 677 S.W.3d 11 (Tex. 2023); Crescent Homes SC, LLC v. CJN, LLC, 445 S.C. 164 (2023). Vague phrases such as “within a reasonable time” create litigation risk.

In the ISO context, strict compliance with contractual transfer provisions is critical. In Process Am., Inc. v. Cynergy Holdings, LLC, 839 F.3d 125 (2d Cir. 2016), the court enforced portfolio-transfer and ROFR-related provisions according to their plain meaning.

Because a ROFR can materially affect liquidity and valuation, its timing and procedural mechanics must be drafted with precision to avoid unintended restraints on transferability.

3. Commission Structure and Residual Rights

Compensation is the economic foundation of the ISO relationship.

Most ISO agreements provide for:

• A share of the merchant discount rate (residuals);
• Upfront bonuses or performance incentives;
• Revenue splits tied to portfolio performance;
• Adjustments based on chargebacks or risk metrics.

In Process America, residual payments became central to the dispute. The contract provided that residuals would continue unless termination was based on a material breach. The enforceability of those provisions depended entirely on contractual language.

ISOs must evaluate:

• How commissions are calculated;
• Whether the split is fixed or subject to unilateral adjustment;
• Whether the bank may modify pricing or fees;
• Under what circumstances residuals may be withheld;
• Whether residual rights survive termination.

Residual stream stability is critical to valuation. Even minor pricing adjustment clauses can materially affect long-term income.

4. Non-Solicitation and Post-Termination Exposure

ISO agreements frequently include post-termination non-solicitation provisions.

In Process America, the ISO was found liable for soliciting merchants after termination. The court rejected arguments that prior breaches excused later conduct.

The Second Circuit explained:

“A partial breach by one party does not justify the other party’s subsequent failure to perform; both parties may be guilty of breaches, each having a right to damages.”

ISOs must assess:

• Duration and scope of non-solicitation;
• Whether restrictions apply to affiliates;
• How non-solicitation interacts with ROFR provisions;
• Whether residual forfeiture is triggered by violation.

Post-termination restrictions are routinely enforced.

5. Liability Caps and Risk Allocation

Merchant bank agreements commonly include liability-limitation provisions.

The Second Circuit observed:

“New York courts have routinely enforced liability-limitation provisions when contracted by sophisticated parties, recognizing such clauses as a means of allocating economic risk in the event that a contract is not fully performed.”

ISOs must determine:

• Whether liability is capped and at what amount;
• Whether indemnification is excluded from the cap;
• Whether carve-outs exist for gross negligence or willful misconduct;
• Whether liquidated damages provisions apply.

Courts treat these clauses as negotiated economic risk allocation.

6. Indemnification for Card Network Assessments

Card organizations may impose fines and reimbursement obligations through acquiring banks.

In Banc of America Merchant Services, LLC v. Arby’s Restaurant Group, Inc., 2021 NCBC 41 (N.C. Super. Ct. 2021), the agreement required payment of:

“[…] all assessments, fines, penalties, fees, Card issuer reimbursements and similar charges imposed by Card Organizations on BANK (the ‘Card Organization Penalties’), directly related to MERCHANT’s Card transactions or based on MERCHANT’s actions or failure to act with respect to compliance with the Card Organization Rules or Merchant’s breach of Section 13 (Information Security)”

The court clarified:

“A claim for contractual indemnity is a claim for direct damages, not consequential damages.”

ISOs must carefully evaluate indemnity exposure, particularly in data breach scenarios.

7. Data Security and Contractual Risk Allocation

In Cmty. Bank of Trenton v. Schnuck Mkts., Inc., 887 F.3d 803 (7th Cir. 2018), issuing banks sought tort recovery following a data breach. The court rejected the attempt:

“For more than fifty years, state courts have generally refused to recognize tort liabilities for purely economic losses inflicted by one business on another where those businesses have already ordered their duties, rights, and remedies by contract.”

The court further explained:

“Courts invoking the economic loss rule trust the commercial parties interested in a particular activity to work out an efficient allocation of risks among themselves in their contracts.”

Risk allocation must be negotiated at contract formation. Courts rarely expand remedies beyond the contract.

8. ISO Rights and Protections

Beyond compensation and ownership, ISOs should ensure the agreement clearly defines their rights, including:

• Access to merchant performance data;
• Audit rights to verify commission calculations;
• Transparency in fee adjustments;
• Notice requirements before pricing changes;
• Cure periods before termination;
• Protection against unilateral reassignment of the portfolio.

Rights not expressly granted may not be implied.

9. Dispute Resolution Mechanisms

Dispute Resolution Mechanisms

An ISO agreement should clearly define how disputes will be resolved, as these provisions frequently determine leverage, cost exposure, and procedural advantage in the event of conflict.

Most merchant bank agreements include mandatory arbitration clauses.

Under 9 U.S.C. § 2 (Federal Arbitration Act), arbitration agreements are deemed: “[..] valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract”

The U.S. Supreme Court reinforced this principle in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), holding that state rules that interfere with arbitration are preempted when they:

“[…] stand […] as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”

As a result, arbitration clauses in ISO agreements are generally enforced according to their terms.

Even where ISO agreements are adhesion contracts, courts do not invalidate arbitration provisions solely on that basis. In commercial disputes, courts emphasize enforcing contractual language as written and avoiding interpretations that render provisions “superfluous or meaningless.” (Process Am., Inc. v. Cynergy Holdings, LLC, 839 F.3d 125 (2d Cir. 2016))

ISOs must therefore carefully review:

• Whether arbitration is mandatory or optional;
• The scope of disputes covered (including arbitrability determinations);
• Governing law and venue selection;
• Allocation of arbitration costs and fees;
• Whether class action waivers are included;
• Whether certain claims (such as injunctive relief or collection actions) are carved out.

Carve-out provisions may create procedural imbalance if, for example, the bank reserves the right to litigate certain claims in court while requiring the ISO to arbitrate all disputes.

Cost allocation is also critical. For example, the Ponca Tribe of Nebraska Code § 6-12-9 provides that in adhesion contracts:

“[…] the drafting party shall bear all costs and fees of the dispute resolution process, including arbitrator compensation”

While jurisdiction-specific, this illustrates how governing law can materially affect enforcement and financial exposure.

Dispute resolution provisions are not procedural formalities. They directly influence enforcement of liability caps, indemnification rights, commission disputes, and termination conflicts.

Because arbitration clauses are broadly enforced under federal law, ISOs must negotiate these provisions carefully before execution of the agreement.

Key Considerations for ISOs

Before entering into a merchant bank agreement, an ISO should assess portfolio ownership, ROFR provisions and their defined timing mechanics, commission and residual structure, non-solicitation restrictions, indemnification exposure, liability caps, reserve requirements, and dispute resolution terms.

At Dilendorf Law Firm, we advise ISOs and payment industry participants on contract negotiation, risk allocation, and dispute resolution.

Contact us at info@dilendorf.com to protect your enterprise value and contractual rights.