Residuals are a driving force behind one of the most important parts of the payments industry – independent sales organizations (ISOs). Residuals represent the reward that brings ISOs and new independent agents into the space, without whom a small handful of payment processors would be left to try to handle the millions of merchants across the globe on their own – an impossible task. Yet, despite their importance, residuals have also long represented a burden for ISOs due to the complexity of residual calculations. Today, however, calculating and paying out residuals is easy thanks to new technologies available to ISOs. The following is a brief rundown of the ins and outs of residuals, how they work, how they used to be calculated, and how innovative software has changed the game for the better. 


What are Residuals?

Whenever an electronic payment is processed, a number of companies are involved. At a minimum, the transaction involves the acquiring and issuing banks, and a payment processor that provides the infrastructure the transaction processing runs on. However, in most cases, an independent sales organization or payment facilitator (PayFac) is also involved. ISOs and PayFacs are responsible for the recruiting and ongoing support of merchants, and they often employ their own independent agents as well. 

Residuals are the small fractions of each transaction that go to independent sales organizations, PayFacs, and independent agents as compensation for the work they do and the important role they play in the industry. The amount earned on any given transaction is minuscule, but even the tiniest residuals have the potential to add up fast. 

Whenever a merchant takes an electronic payment, their payment processor charges a small transaction fee, generally ranging somewhere between one and three percent of the overall transaction value. The ISO, who has a direct relationship with the processor, then earns an even smaller slice of the fee, often amounting to a fraction of one percent. However, with each merchant processing hundreds or thousands of transactions a day, and potentially hundreds of merchants in an ISO’s portfolio, residuals snowball and can be exceptionally valuable. 


Why are Residuals So Important to ISOs and Agents?

With residuals’ ability to compound quickly, it’s clear why they’re so important to ISOs and independent agents – they represent the bulk of revenues brought in by reselling processing services, by far. The more merchants an agent or ISO can sign up, the larger and larger their residuals portfolio grows. And, because residuals are owned for the lifetime of the merchant’s relationship with the processor, they effectively generate passive income that continues to come in for years after a merchant has been recruited. 

But there is more to residuals than just quantity. Quality matters too, because the quality – or, more accurately, stability – of an ISO’s residuals portfolio has a huge impact on that portfolio’s potential sale value. Because residuals last for years or even decades after merchants are recruited, at some point, an ISO or independent agent may decide that the value of their portfolio is large enough to exit the space altogether through a sale. Sales values are based on a multiple of the portfolio’s monthly residual value, and a stable portfolio built on trustworthy, well-established merchants will demand a higher multiple than a portfolio with a lot of turnover or uncertainty. 


How are Residual Calculations Done Traditionally?

Residual calculations are traditionally an enormous pain for ISO managers. Each month, residuals are paid out by each of an ISO’s partners, and reports are delivered outlining the month’s activity in detail. The problem is, not all payment processors necessarily pay at the same time, and their reports are all distinct, leaving ISO managers with a pile of different documents that need to be combined manually to gather a complete picture. Once all the individual reports have been merged, managers then need to calculate their independent agents’ commissions, known as “splits.” Splits represent the even smaller chunk of the residual that the agent earns on each transaction processed by a merchant they recruited. With half a dozen or more payment processing partners, and potentially dozens of independent agents onboarding merchants to any of those partners, residuals are complex, and getting the numbers together each month is a time-consuming and annoying prospect for most ISOs. 


How Can Residual Calculations Be Improved?

Luckily, there is a better way to handle monthly residuals that requires no manual report merging, no manual calculations, and almost no time whatsoever: IRIS CRM – the payments industry’s top customer resource management platform. 

IRIS CRM takes in each residual report from each distinct payment processing partner and automatically combines them in the system’s easy-to-use reporting dashboard. In a matter of a few clicks, ISO managers can generate a unified report containing all of the information they need, without having to sort through any of the information they don’t. Users can custom configure reports to display data on a portfolio-wide level or any processor they choose, with custom time frames and custom reporting criteria. The old process of merging reports is entirely eliminated, saving ISO managers countless hours. 

Better still, because each agent’s splits are already entered into the CRM at the time a merchant is boarded, when residuals reports drop each month, IRIS CRM automatically applies splits and outputs the exact amount each agent is due right down to the penny. 

The result is that ISO managers can perform the entire residuals calculation process in a matter of minutes, reclaiming wasted time so they can focus more on steering the ship and maximizing growth. On the agent side, instant calculations mean faster, more accurate payouts and happier, more loyal agents – a key advantage for the ISO when recruiting top sales talent. 


To find out more about how IRIS CRM can revolutionize the way your ISO handles residuals, reach out to a member of the team or schedule a free-guided demonstration of IRIS CRM today.