Aggregation Considerations

17 Apr

The world of payments is changing, and the card brands are keeping up.  Recognizing that face-to-face micro-merchants have an interest in accepting payment cards, Visa and MasterCard now permit small merchants of all commerce types to be aggregated under a master merchant.  Previously only internet merchants could be sponsored this way.  But aggregation has been extended to new merchant types, including face-to-face merchants.  This is big news, with potentially big revenue opportunities. Many ISOs are wondering whether they should either become, or sponsor, a merchant aggregator.   Below are a few of the many factors a company should consider.  

Both card brands treat the aggregating entity as a merchant.  So in addition to special rules relating to aggregators, all requirements imposed on merchants also apply to the aggregators themselves.  The nuance is that now these “merchants” are permitted to provide payment processing services to smaller “sub-merchants”.   This means that master merchants assume all loss liability of their sub-merchants, resulting in greater due diligence of master merchants by acquiring sponsors.  It should also result in sponsor merchants instituting robust underwriting processes to investigate sub-merchants before accepting them.  Likewise, risk mitigation by master merchants, such as volume limitations or reserve requirements imposed on sub-merchants, will be critical. 

Certain merchant types, such as up-selling, infomercial, and multi-level marketing businesses can never be aggregated.  And once a sub-merchant’s annual volume hits $100,000 per card brand, that sub-merchant is ineligible for aggregation, and must have a contract directly with the acquirer.  In addition, special contractual provisions are required to be included in the master merchant/acquirer agreement and in the sub-merchant/master merchant contract.  

Aside from the card brand rules, there are other regulatory considerations.  If the funds generated from card acceptance will be sent to someone other than the sub-merchant, then state and federal laws surrounding money transmitters may be implicated.  This is a whole different world.  The Federal Bank Secrecy Act and each of the states regulate the transmission of money by any entity that is not a chartered financial institution.  Closely analyze whether your program needs to comply, and budget for undertaking this analysis to be conducted by an aggregation expert. 

The revenue potential opened up by the new aggregator rules could be huge.  As with any opportunity, there is also risk.  Structuring the business with relevant regulatory considerations in mind will facilitate minimizing the hazards while reaping the greatest rewards.

Holli Targan

Attorney & Partner

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