During a global financial situation like we have today, it’s very easy for a lot of things to go unchecked and merchant account providers are no exception. I will save the complexities for a later point, but to sum things up, the vast majority of merchant accounts are managed and provided by Merchant Service Providers which are basically just resellers for larger ISO’s which ultimately just resell for big banks such as Wells Fargo (NYSE WFC) and Bank of America (NYSE BAC). Think of merchant service providers to banks much like insurance agents are to insurance companies such as American International Group, Inc. (NYSE AIG) — same concept.

The challenge becomes while the banks themselves are somewhat protected as merchant accounts are often valuable commodities that eventually get sold off if the bank goes under but what about the ISO’s under them? The problem becomes that many struggling ISO’s are in fact borrowing against these residual streams of revenue but then what happens if they default? Ultimately, the merchants themselves are somewhat okay, as who owns the residual stream has little value to the end merchant but what about the merchant service providers servicing those accounts?

Think of it this way, what happens when your insurance agent discovers that he has lost all future revenue stream from your policy? Now arguably you would imagine that they would continue servicing you but the reality is very different. Many Merchant Service Providers are going to face this very same issue in 2009 and most don’t even realize it yet. As so many ISO’s are depending heavily on a bang out holiday season that may never come, many of these ISO’s may find that those loans and advances they took out on the merchant portfolios cannot be paid up, resulting in the loss of the portfolios and ultimately the revenue streams to the Merchant Service Provider themselves.

So what’s next? Well, I gather that new owners of these merchant portfolios will look to limit attribution by servicing their newly boarded Merchant Service Providers but the fact is most probably will not, leaving merchants without someone to immediately service their needs and the next pain point of this economical slump the very segment of the industry that has built the banks’ merchant portfolios and that’s the Merchant Service Providers themselves.

It’s a very unfortunate situation. and one that has gone unnoticed until recently but unfortunately because most don’t understand how the overall process works, and merchants ultimately don’t really give too much concern over who is servicing their accounts as long as the bill is paid at the end of the day, the end result will leave an already battered merchant services industry in ruins, as thousands of operations that depend so much on residuals from their portfolio find out that the ISO which they trusted for so many years lost it in nothing more than a bad case of three-card monte.

Good luck MSP’s, I feel for you and wish you the best, my word of advice would be to better understand who your ISO’s are and make sure that your accounts aren’t being leveraged right from under you.