Competition to put card-acceptance gear in the hands of mobile, small and vertical niche merchants is heating up. This has prompted more acquirers to reduce friction in the boarding process by signing up multiple clients under a single master merchant account, instead of using the time-consuming process of establishing an account for each seller.
The practice, known as merchant aggregation, has been widely viewed as a solution to solve the micromerchant problem. However, ISOs and acquirers are discovering benefits for a broader base of clients. The most compelling advantage is the frictionless boarding process, but it can simplify funding individual merchants as well. Aggregation can become a cost-effective and extremely easy payment acceptance method.
Today, companies are using the aggregation model to address customer needs and capture market share. At the same time, smart companies are assessing whether they can compete profitably against the huge infrastructure and capability of technology providers like PayPal and Square. The key to gaining a stable position in today’s rapidly evolving payments landscape is to develop a competitive, customer-centric strategy that combines the strengths of traditional merchant processing with advanced approaches to underwriting, risk management and specialized customer service.
Merchant aggregation has been an online merchant acquiring model for nearly two decades, and PayPal used it most notably. In 2011, rule changes at Visa and MasterCard sanctioned merchant aggregation for physical points of sale, and it is no longer the four-letter word that it once was.
In the past, ISOs and acquirers tended to ignore micromerchants because of perceived high attrition and low margins. Then Square came along and changed perceptions by offering its simple card-swipe dongle for smartphones and tablets, and coupled it with simple, easy-to-understand, and affordable processing fees. As a result, Square has grown dramatically and now has some 3 million users.
Even Square’s recent setback in Illinois, where it ran afoul of regulators, does not pose a threat to the fundamentals of aggregation. You can bet Square will address the cease-and-desist order from the state’s Department of Financial Institutions by doing what is necessary with regard to money transmitter requirements. But, the hassle drives home the important point that aggregators must follow proper due diligence, and they must meet all government and card brand requirements, even if it means hiring experts to help establish procedures to avoid potential pitfalls.
While Square has focused industry attention on meeting the needs of micromerchants, the company is moving upmarket to small- and medium-size merchants such as restaurants, hair salons, physicians, law and firms. These businesses have long been the sweet spot of profitability for acquirers. This will likely drive even more attention to leveraging the aggregation model as a tool for meeting the needs of a broader base of merchants, and it is already driving tremendous interest from ISOs, value added resellers (VARs), software as a service (SaaS) companies and acquirers.
Regardless of size, merchants value robust functionality and technology that takes them beyond the ability to accept and process transactions at competitive discount rates and manage chargebacks. ISOs, VARs and SaaS developers are focused on enhancing their customers’ experience and their bottom-line by bundling services in a seamless operation. Many are looking to merchant aggregation as a way to more efficiently and effectively reach vertical and horizontal markets by offering better end-to-end business capabilities like data management and marketing solutions, and cloud-based point-of-sale systems.
Aggregation can harmonize technology, people and process. The traditional merchant acquiring structure, with multiple contracts and third-party agreements, can be complex and expensive for small merchants. Using Visa’s Payment Service Provider (PSP) and MasterCard’s Payment Facilitator (PF) models, where the aggregator is the master merchant, processing complexities become less obvious to the sub-merchant end user.
Since this model significantly right-sizes the setup process, it provides a cost-effective transitional solution for new small merchants that will eventually grow their business volume. With aggregation, merchants can begin processing quickly while the acquirer implements staged underwriting to ensure the merchant meets certain requirements as its transaction volumes near card brand thresholds. For example, once merchants exceed $100,000 in annual card sales with any one brand they must establish a conventional tri-party merchant agreement.
Aggregation also offers an excellent solution for funds management. Aggregators are responsible for funding, so they can remove fees, hold funds to cover themselves if a merchant has issues, separate the payments, or otherwise match the funding to the amount owed. However, the aggregation model is not recommended for acquirers who intend to use it solely as a way to lower Fixed Acquirers Network Fees (FANF). Although there currently is a disparity between the fees traditional acquirers versus aggregators pay, it is very likely that Visa will change that in the future.
The explosive growth in mobile acceptance has underscored the method’s advantages for boarding multiple merchants quickly and efficiently. Getting these merchants into the system with their own merchant account requires numerous manual steps. Merchant aggregation features fast, easy setup and streamlined boarding process because aggregators can control the setup process and merchant contract. Merchant applications can be simplified. For example, Square requires 14 data elements for sign up and acceptance versus up to 240 fields of information required for establishing a traditional merchant account.
Underwriting time frames also can be shortened without increasing risk. Faster underwriting with proper “know your customer” (KYC) controls that use the right methodology, tools and techniques removes friction while fully meeting regulatory compliance and governmental standards. Aggregators still need to address the basic questions that are fundamental to good underwriting; it is a matter of managing risk by knowing who the owner is, what the business does and where it does business.
So, is aggregation riskier than other models for merchant acquiring?
The risks are not necessarily greater, they are just different, and they can be managed. Merchant aggregation requires more attention to upfront risk management. Processors must adjust their systems to more closely monitor transactions, fraud and funds flows on the first transactions.
Aggregators must monitor transactions more stringently to spot issues faster and they must be able to provide underwriting and processing statistics to the acquirer upon demand. Sub-merchants must be monitored just as traditional merchants are, but it requires a system tailored to look at transactions at the sub-merchant level. It is also incumbent upon the acquirer to monitor the PSP/PF to ensure proper protocol is followed.
Treasury reconciliation also differs from the traditional acquiring model. The aggregator receives the settlement, reviews the transactions and then settles to the sub-merchant. Depending upon risk levels, settlement can occur the same day, or in arrears, but not until the aggregator is satisfied all transactions are compliant. Each sub-merchant’s chargebacks must be monitored as well.
Aggregators can remove fees prior to settlement, which gives them the ability to offer streamlined and competitive processing fees to the sub-merchant. They are also able to provide one statement, which includes processing statistics as well as aggregator specific service and fee information.
Another key to managing risk and maximizing profit is customer service technology. It is critical to have customer service visibility, or a portal. ISOs can build or buy a system specifically to manage the aggregation processes. But, it is not a one-size-fits-all, cookie cutter solution. There are many types of aggregators. Levels and methods of participation vary. Some want to control all aspects of the transaction, including funds flow, information flow and customer service, while others don’t. Having a system that can help aggregators manage customer relationships and merchant activity can go a long way in minimizing risk.
The future of aggregation coincides with an increase in competition for traditional ISOs and processors from non-payments companies. For example, independent software vendors (ISVs), VARs, and SaaS developers have strong ties with their merchants based on the high direct value provided through their software. Many offer the complete solutions that merchants want. SaaS companies generally want to control their client experience. These small business sales channels often are sophisticated about software but don’t know payments. This creates opportunity for payments industry experts who offer frictionless card processing options.
ISOs need to assess how different means of aggregation fit into their unique business strategy. While aggregation is a more flexible alternative that gives ISOs and acquirers more control over the merchant experience, it may not be the right business model for everyone. Even if full implementation isn’t the ideal solution, payments pros can benefit from the learnings of the last few years as inspiration to improve their businesses.
A growing number of ISOs and acquirers are jumping into this business, including large processors like Total System Services through its acquisition of ProPay. Still, there is a lot of room and opportunity for nimble acquiring experts who move fast to take advantage of the opportunities in merchant aggregation.
When competing with industry disrupters like Square and technology-driven players, acquirers must innovate in ways that fit their strengths. Those who offer “feature-rich” solutions and target vertical markets where they have strong market knowledge, expertise and relationships can deliver far more value than those going after the broad market with a horizontal strategy – that is better left to Square.
(Deana Rich is president of Deana Rich Consulting Inc. Reach her at email@example.com. Todd Ablowitz is president of Double Diamond Group LLC. Reach him at firstname.lastname@example.org.)