Digital Transactions Authoritative, insightful and timely information for payments professionals
n
Just who should or should not be a payment card-accepting merchant is a question that sprang up more than a decade ago when PayPal Inc. appeared on the scene. Debate about it rages on today in the era of Square Inc. and other processors signing hundreds of thousands of tiny merchants for mobile-payment services, many of them part-time businesses or even individuals who only occasionally sell goods.
n
n
In an informal poll of about 300 merchant-acquiring executives at the Electronic Transactions Association’s Strategic Leadership Forum last week in Chicago, 80% of respondents disagreed with the statement, “Traditional acquirers/processors should not be concerned by Square and their model.” And asked whether they agreed with the statement, “Internet payment service providers (IPSPs) like PayPal are a direct threat to acquirers and card brands,” 70% said yes and 30% said no.
n
n
Attendees answered both of those questions electronically during a panel session titled “The Question Everyone Is Asking: What is a Merchant?” Until PayPal came along, the answer was pretty easy: a business with a bona fide physical location that had passed an underwriting screen that admittedly varied in rigor depending on the standards set by the merchant acquirer or independent sales organization. PayPal changed the game by booking online merchants, aggregating transactions for them, and acting as the merchant of record. Square, which also acts as an aggregator, is taking its cues from PayPal as it brings mobile-payments to hundreds of thousands of small and part-time businesses.
n
n
While no one came away with a cut-and-dried definition of a card-accepting merchant in the new era of mobile and online payments, attendees learned that the bank card networks are setting some limits on aggregation. Visa Inc. in July said any merchant generating $100,000 or more in annual charge volume needs its own account with an acquirer. MasterCard has also adopted a similar rule, according to a company executive.
n
n
Aggregation enables businesses that may be too small or risky to obtain a traditional merchant account to accept general-purpose payment cards. The practice is controversial, however, in part because it makes it harder for networks to monitor just who generates transactions and the attendant risk. “It’s more difficult to sufficiently know the merchant,” said panel moderator Debra Rossi, executive vice president of Merchant Payment Solutions at Wells Fargo & Co.
n
n
Rossi recounted the intense scrutiny PayPal endured from networks and acquirers after it was founded in 1998. The scrutiny was natural, but PayPal in acting as an aggregator for the new online merchants addressed “a clear gap” that traditional acquirers weren’t covering, she said. Wells is PayPal’s acquirer and stuck with the company even when the networks wanted to slow its high growth, according to Rossi. “We knew it was going to be a win-win,” she said.
n
n
Besides the risk, many bankers and acquiring executives resented PayPal because they feared it might relegate traditional payments firms to the sidelines. PayPal eventually became an accepted part of the payments landscape as it developed tactics to control online risk.
n
n
But the whole issue of aggregation and risk control in new payments venues began flaring anew about three years ago when software programs that enabled businesses to accept payments on Apple Inc.’s iPhone appeared. The controversy took center stage when Twitter co-founder Jack Dorsey founded Square in 2009 and deliberately courted tiny merchants. Square gives these merchants a cube-shaped card reader that plugs into their smart phones. The reader is now available at Wal-Mart Stores Inc. and at some other retailer locations, in addition to Square’s Web site.
n
n
“As we have more of these smaller merchants, more devices, it just multiplies on that same [risk] problem,” said panelist Matt Johanson, vice president of Network Operations at Discover Financial Services.
n
n
Despite the uncertainties, 81% of audience members voted in agreement with the statement that, “mobile devices will change our industry dramatically over time.”
