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DT, April 2014

Acquiring: How Merchant Aggregators Are Shaking Up Payments
April 1, 2014

Peter Lucas

Merchant aggregators are leading the charge to simplify merchant on-boarding and add value to payment technology. Can traditional ISOs catch up?

It’s only been a few years since Visa Inc. and MasterCard Inc. relaxed their rules to officially recognize merchant aggregation, but in that short time the aggregator model has spread rapidly across the payments landscape.

Aggregators’ ability to simplify the account-application process and package with their core technology easy-to-install payment solutions that merchants can white-label has been an unequivocal hit, especially with micro-merchants.

Consequently, aggregation is no longer the dirty word it once was in some circles of the payments world. But then again aggregators have been misunderstood entities, since they don’t service the same kind of merchants that independent sales organizations do.

In its most basic form, aggregation involves the processor or specialty provider standing in as the merchant of record for card transactions generated by its micro-merchant clients (“The Rise of Merchant Aggregators,” April 2013).

Overlooked Merchants

Micro-merchants are a different breed of payment card acceptor with different needs from those of traditional storefront and card-not-present merchants. The prototypical micro-merchant is an individual who sets up shop in an online marketplace or has a booth at a fair and views himself less as a merchant and more as someone who needs to accept credit and debit cards to facilitate a sale to another individual.

Micro-merchants want fast, frictionless setup. The more hoops they have to jump through to obtain a merchant account, the more difficult it is to integrate payment solutions into their store, and the more steps their shoppers have to take to complete a card payment, the less likely they are to buy into the traditional ISO-acquirer model.

“The Internet and mobile technology have made it so much easier for merchants to set up shop and market their business that the model ISOs have used to sign and service merchants is changing fast,” says Jareau Wade, co-founder and vice president of growth for San Francisco-based Balanced Inc., an aggregator specializing in online marketplaces. “Aggregators are allowing new merchants to accept payments that a lot of ISOs and banks would have otherwise overlooked.”

Indeed, most micro-merchants don’t even appear on ISOs’ radar because they are too small. That’s ironic since ISOs were created to reach the small businesses that merchant acquirers’ direct sales forces couldn’t.


Nor do most micro-merchants even know how to go about finding an ISO or acquiring bank. Those that do are usually so put off by the extensive application and credit-screening process that they set out in search of a less cumbersome way to obtain a merchant account.

But most telling as to why aggregators are thriving when it comes to servicing micro-merchants is that they typically provide a core technology such merchants need to get their businesses up and running, such as Web-site design or access to an online marketplace where consumers can discover them.

“Aggregators are technology companies that see payments as a way to add value to their solutions, which is something ISOs and acquirers have been challenged to do,” says René M. Pelegero, president and managing director of Woodinville, Wash.-based Retail Payments Global Consulting Group. “Prior to aggregation, merchants had to have separate relationships with acquirers and their technology suppliers, which could be cumbersome for small merchants to manage. Aggregators simplify it by putting it all together under one umbrella.”

Intuit Inc.’s QuickBooks Payments, for example, allows small businesses to accept payment on a purchase or invoice and their customers to receive and pay invoices via email. Integrating their payments platform with Intuit’s QuickBooks software allows businesses to automatically flow payment information, such as transaction fees and payments received, into accounting spreadsheets.

Businesses can also set up recurring payments, allow multiple users to accept and view transactions, track transactions and deposits, and access reports online.

“Payments is a core need for small business, and seamlessly integrating these workflows together saves businesses time and the cost of paying someone to enter the accounting information around each transaction,” says Jon Fasoli, senior product manager for Intuit’s Payments Division.

Mountain View, Calif.-based Intuit, which settles transactions through the big acquirer Chase Paymentech, developed the QuickBooks Payments platform in-house.

Staged Reviews

Besides providing plug-and-play payments solutions, a large part of aggregators’ appeal to merchants is their ability to remove the friction from doing business with them.

This is achieved in two steps: first by streamlining the lengthy account-application process, then by allowing merchants to white-label their payments solution. The latter removes any qualms consumers may have over leaving the merchant’s Web site and providing their card information to a third party.

“In the world of marketplaces, merchants that redirect a customer to another site for any reason can lose up to 25% of those customers, because it adds complexity to the purchasing process. The more complex that process is, the more unacceptable it is to consumers,” explains S. Philip Kennard, chief executive and chief technology officer for Futurestay Inc.

Somerset, N.J.-based Futurestay, which provides owners of vacation rental properties with tools to develop and market their own Web sites and accept credit cards for reservations, packages Balanced Inc.’s payments platform with its software. Balanced holds the merchant account through acquirer Vantiv Inc.

The way aggregators streamline the account-application process is by significantly reducing the number of questions asked of a merchant to gauge risk. Many micro-merchants view being asked dozens of questions about their business plans and credit histories as an intimidating process. Instead, aggregators ask just enough questions to piece together sufficient information about the merchant to generate a risk score.

Once the merchant begins accepting payments, but before any funds are released, a more thorough screening of the business is conducted to reassess the risk level. Releasing a merchant’s funds only after that process is complete assures the business owner’s cooperation.

“Although aggregators take a tiered approach to merchant on-boarding, they do so within the rules set forth by Visa and MasterCard for setting up a merchant account,” says Deana Rich, president and chief executive of Los Angeles-based Rich Consulting. “Aggregators still have to know who their merchants are, the product they are selling, how they sell it, and their risk level. Aggregators put merchants under the same level of review as ISOs, only they do it in stages.”

Spurring aggregators to adopt a tiered on-boarding approach is their knowledge that many micro-merchants that obtain a merchant account never activate it, according to Rich. Performing a thorough screening of these merchants up-front would cost the aggregator more time and money. In addition, tiered screenings enable accounts initially to be set up in minutes, which plays well with micro-merchants’ penchant for a fast solution to accepting cards.

“The sooner a merchant can set up an account with an acquirer, the sooner they can refocus on building their business,” says Futurestay’s Kennard. “A lot of marketplace merchants kick the tires at first. Our first goal is to get them more vested in setting up and managing their business and making sales, and streamlined on-boarding helps with that.”

Scrambling to Catch up

What’s preventing most ISOs and acquirers from adopting a tiered application process? Their thought process about how best to gauge merchant risk remains grounded in the past, according to consultant Pelegero, a former PayPal Inc. executive. As an early aggregator, PayPal sought to build its merchant base by streamlining the traditional process of qualifying merchants to accept cards, he says.

“Historically, acquiring banks counted on 1% of their merchant clients as being potentially bad accounts,” Pelegero says. “PayPal took the opposite view, that if the remaining 99% were good accounts, why not make it easier for them to get onboarded as ongoing due diligence would ultimately identify the 1% that needed to be weeded out.”

In doing so, PayPal was able to bring a higher level of satisfaction to small merchants when it came to the account-application process than ISOs and acquirers using more traditional methods, Pelegero adds.

Since then, other large aggregators such as Square Inc. have played a pivitol role in making the streamlined application process ubiquitous among aggregators. Not surprisingly, many ISOs are scrambling to catch up with aggregators when it comes to modernizing their account-screening processes.

“We are seeing more ISOs looking to do frictionless on-boarding and move into aggregation. Support for the aggregation model among acquirers is also increasing,” says Todd Ablowitz, president of Centennial, Colo.-based Double Diamond Group, which specializes in helping ISOs become aggregators.

In addition to Chase Paymentech and Vantiv, Wells Fargo Merchant Services is the third leg of the so-called Big Three acquirers actively supporting aggregation. Balanced, for example, has worked with all three companies since its inception in 2011, according to co-founder Wade.

Beyond the Big Three, finding an acquirer that will support aggregation can be tough. “Even though digital-payments technology is transforming the merchant world, few acquirers and ISOs have caught up with the aggregator model,” says Wade.

Omni-Channel Payments

Still, some aggregators are pushing the envelope further. Stripe, a San Francisco-based aggregator, has sold portions of its platform to Shopify, an aggregator based in Ottawa, Ontario. Shopify uses payments to complement its core business of providing templates for e-commerce stores.

Shopify turned to Stripe to help simplify its merchant on-boarding process after it learned many businesses applying for a sub-merchant account through its payments engine dropped out because it took too long to receive an approval. The company tested Stripe’s application process and later added it to its payments platform, which it developed in-house.

Since then, Shopify has developed a point-of-sale application that enables physical retailers to accept payment through an iPad and view in-store and online inventory and customer orders across both sales channels.

“It’s an omni-channel payments solution that makes it easier for merchants to accept cards and is packaged as part of our core technology offering,” says Louis Kearns, director of payments for Shopify, which has it merchant account through Wells Fargo.

Thanks to their ability to deliver easy-to-integrate payment solutions and technology that can help micro-merchants get their businesses operating, aggregators have a huge advantage over ISOs when it comes to finding prospective merchants. Unlike ISOs that knock on merchants’ doors in an attempt to win their business, aggregators enjoy the luxury of having micro-merchants come to them.

“Marketplaces like Uber know they need payments technology and their options are to either build it themselves, which is not always appealing, or partner with a third party that won’t allow them to white-label their payment solution, which creates a disjointed user experience,” says Rich Aberman, vice president, product, and co-founder of WePay Inc., a Palo Alto, Calif.-based aggregator. “For most merchants, finding a partner provider with an easy-to-integrate solution that lets them control the user experience is a more appealing alternative.”

Not content to just sit back and wait for merchants to come to them, some aggregators are actively heightening their brand profiles through business-development teams, blogging, and creating a presence at payment and retail industry conferences and through social media.

“We are also working with platform providers and software developers,” adds Aberman. WePay’s merchant account is through Vantiv.

Given the extent of change merchant aggregators are effecting in payments, it’s fair to ask just how far their influence can extend. Payment experts fully expect ISOs and acquirers to warm to the idea of frictionless merchant on-boarding as the model proves to be a sound risk-management strategy.

‘No Longer the Wild West’

The bigger question, however, is whether ISOs and acquirers will follow aggregators’ lead and wrap more value-added technology around their core offerings, as opposed to selling strictly on price.

“The aggregator model is just making its way into [the point of sale], but it’s coming because all a merchant needs to accept payment is an authorization with a promise to pay from someone they trust,” says Steve Mott, principal of Stamford, Conn.-based consultancy BetterBuyDesign. “If that can be achieved through a cloud-based message coming into a POS terminal or system, then clearing and settlement become after-the-fact functionality that can be done by the ACH or another network.”

Adds Shopify’s Kearns: “Aggregation is no longer the Wild West.”


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