At WePay, we often talk about ‘aggregation.’ Most often, we’re selling WePay against the idea of aggregation - against a potential partner setting up their own internal payments operation and aggregating funds into a single account. That’s not necessarily an easy concept to understand, though. Here, WePay’s General Counsel, Susan Dunn, takes a closer look at what exactly defines an aggregator.
Payments is a highly regulated industry. Not every flow of funds that is possible as a technical matter complies with applicable laws and regulations.
Take the ability to accept credit cards as an example. These days almost anyone can get a merchant account and accept credit cards as payment. If you read the fine print, however, you’ll discover that the card networks (Visa, MasterCard, and Discover) impose significant restrictions on how a merchant account can be used. Violate those restrictions, and you can incur thousands of dollars of fines and have your merchant account revoked.
Why Card Networks Care
Something that card networks specifically prohibit is aggregation. In general, you should use your merchant account only to accept credit cards as payment for sales or services that you yourself provide. You should NOT use your merchant account to accept credit cards as payment for sales or services provided by others. There are numerous reasons for this, but the main reason is that card networks want to know who are their real merchants. The card networks are at risk if they process payments for transactions that are fraudulent or illegal. Additionally, the card networks charge a different rate for processing (“interchange”) depending on a merchant’s business model and processing history.
Payment Service Providers
Innovative payments companies have pushed the boundaries of these rules. They want to provide merchant accounts to more customers, faster, and with less sign-up friction. To support those efforts, card networks created the category of a "Payment Services Provider" (PSP).
PSPs are authorized to accept credit cards as payment for sales or services provided by others (“Submerchants”). The PSP has to register with the card networks in advance and is liable for fraud and chargebacks by its Submerchants. WePay is a PSP.
If you are not a Payment Services Provider, and you accept credit cards as payment for sales or services provided by others, then you are an aggregator.
From a compliance perspective, this is a serious issue! Not only does it violate the card network rules, but you might be found to be operating an unlicensed money services business, or even an unchartered bank! Financial regulators will be concerned that you might use the money you are holding for your own benefit, rather than sending it to the people who deserve it. And, if you suffer a security breach or just go bankrupt, you might be unable to pay out the money you owe, even if you want to. There are numerous laws with severe penalties for this kind of behavior. For more information, you can examine Chapters 2 and 3 in WePay’s Platform Payments 101.
Different Business Models
Many aggregators are perfectly legitimate businesses with good intentions. In fact, some new marketplaces have wandered into these waters simply through the nature of their business model. Any time money is collected by one party, such as a platform, and distributed to other parties, such as the platform’s users, there is a danger of aggregation. Let’s look at a few examples.
1. Online Payments Company - A company gives small merchants the ability to accept credit cards online. The company collects the money into its own bank account before sending the money to the merchants.
*This company acts as an aggregator. There are two ways to avoid this outcome. First, the company could have each merchant open its own merchant account with an acquiring bank. The acquiring bank could then settle funds to the merchants’ individual bank accounts. Second, the company could register as a PSP and obtain money transmitter licenses or use a licensed or exempt entity to settle funds to the individual merchants.
2. Online Marketplace - An online marketplace accepts payments for all of its users into a single merchant account. The marketplace then pays its users by ACH transfers to their individual bank accounts.
*The marketplace acts as an aggregator. Even if it does not think of itself as a payments company, it is providing payment services and could be subject to the same rules. The right way to approach this is to register as a PSP or to have a unique merchant account for each user, so that the card networks have visibility into their identity and creditworthiness. Additionally, the marketplace should arrange to have funds sent to users without using the marketplace’s own bank account.
3. Crowdfunding Platform - A platform collects money for others and only distributes it to recipients once the total amount raised hits a tipping point. The platform uses a separate payments company to hold the funds collected and to pay them to recipients.
*The crowdfunding platform is not an aggregator. But, it will want to be sure its payments company is following the rules. Otherwise, it could get into trouble if its payments company were subject to regulatory action.
If you’d like more information about the difference between aggregation and WePay’s payments model, please contact us at email@example.com.