Merchant Aggregation: Opportunities & Pitfalls
By Gerritt Kerkstra, TSG of Counsel
Historically, MasterCard and Visa have required a merchant contract for each accepting merchant. These rules require acquirers to “know your customer.” Every merchant contract also contains specific provisions that merchants must meet to accept branded transactions.
Aggregation occurs when funds owed to a merchant of record known to its’ acquirer and the brands were further disbursed to sub-merchants. If an acquirer was aware of this practice occurring it was in violation of the prohibition on aggregating merchants and minimally risked fines and could potentially lose its’ license to acquire. If aggregation was occurring unknown to the acquirer, it was carrying an unknown possible risk to the system and the acquirer. The major risk is chargebacks to sub-merchants with the so-called master merchant unable to meet the obligation and leaving the acquirer on the hook. Lacking a contract stipulating requirements, many sub-merchants were left in the dark regarding their obligations.
For MasterCard and Visa aggregation presented a potential cascade of issues that adversely affected brand reputation with issuers and cardholders alike. These included collection of inaccurate interchange, increased chargebacks and fraud, inaccurate data collection at the POS, potential money-laundering, consumer confusion and disaffection.
What occurred to make the brands change their minds? The internet. Entrepreneurs thought of solutions and created the technology to expand acceptance into difficult to penetrate categories online and among very small merchants that were otherwise unprofitable. More recently, low cost mobile POS solutions make it increasingly feasible to establish acceptance with smaller merchants with small dollar volumes or limited transactions.
Both brands eased aggregation rules in the internet space first and now have extended aggregation to the card present space.
Remember when merchant aggregation was forbidden? Well, things have changed. Both MasterCard and Visa have modified their respective rules and now allow merchant aggregation with certain limitations.
Aggregation is also a useful tool in targeting difficult to penetrate categories due to built in merchant resistance such as lawn service, landscaping, property rental, vacation rental, professional services, remote sales, construction, home repair, flea markets and a score of other MCCs.
Depending upon current and future pricing actions by the brands, aggregation may turn out to be a useful strategic tool in lowering card brand fees.
However, acquirers and ISOs need to be alert to the inherent risks of aggregation as well. Monitoring of PFs/PSPs and their sub merchants is an essential part of any aggregation program to insure that programs remain in compliance and in good standing with the payment brands.