Aggregator Rules Evolve

11 Dec

 It’s been awhile now since Visa and MasterCard revised their rules to permit merchant aggregation of payment transactions.  Recently MasterCard refined the concept yet again, this time to increase the annual dollar volume limit a sub-merchant may process to $1,000,000, and to institute a few other tweaks to the merchant aggregator program.

 A refresher:  Back in 2011 Visa and MasterCard revised their rules to permit small internet and face-to-face merchants to be aggregated under a master merchant.  Both card brands treated the aggregating entity as a merchant.  So in addition to special rules relating to aggregators, all requirements imposed on merchants also applied to the aggregators themselves.  These “master merchants” are permitted to provide payment processing services to smaller “sub-merchants”.  MasterCard calls this a Payment Facilitator or “PayFac”.  Visa uses the Payment Service Provider or “PSP” nomenclature.  Once a sub-merchant’s annual volume hit $100,000 per card brand, that sub-merchant was ineligible for aggregation, requiring a contract directly with the acquirer. 

 The aggregator model has enabled small merchants to accept payment cards.  It also has enabled a broader array of companies to offer payment processing services.  All sorts of entities are electing to become aggregators.  Previously any non-bank company that desired to generate revenue by providing payment processing services to merchants was required under the card brand rules to become an independent sales organization, or ISO.  The aggregation rules now allow those entities to become aggregators instead.   In some instances traditional ISO companies are qualifying as aggregators.  And companies that have created software that caters to a certain merchant vertical are bundling their software offerings with payments under the aggregator construct.

 This past October, MasterCard revamped its PayFac standards.  PayFacs are now classified as a type of service provider, rather than a merchant.   The permissible submerchant transaction volume was raised from $100,000 to $1,000,000 in annual MasterCard volume.  Entities with higher annual volumes must enter into direct merchant agreements with an acquirer. 

 In addition, the revised rules state that performing a credit check when screening a prospective merchant or submerchant is not required if the entity has annual MasterCard transaction volume of $100,000 or less.  Further, the new standards specify clauses that must appear in contracts between PayFacs and submerchants, and mandate that submerchant contracts must include all provisions required to be included in a standard merchant agreement.

 We have observed an interesting evolution in the contract terms entered into between PayFacs and acquiring sponsor banks.  As the acquirers gain experience with the PayFac model, that is reflected in a shifting of the terms under which acquirers are willing to sponsor aggregators.  History proves that nothing ever stays the same in the payments business; we expect this new aggregator model will continue to morph and have an effect on the payments landscape for some time to come.

 –Holli Targan, Attorney and Partner, Jaffe, Raitt, Heuer & Weiss, P.C.

Holli Targan

Attorney & Partner

htargan@jaffelaw.com

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