As reported in Digital Transactions, an informal poll of panel attendees at the Electronic Transactions Association’s annual Strategic Leadership Forum in Chicago revealed that executives in the merchant acquiring industry are concerned with both the potential competition and the relative risks posed by merchant aggregators like Square and PayPal. Merchant-of-Record services are typically extended to businesses or individuals who wouldn’t normally qualify for a dedicated merchant account in an acquirer’s portfolio. Aggregators of this type (or IPSPs, internet payment service providers) are limited to handling merchants with less than $100,000 in annual card sales according to card network rules.
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.
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.
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.
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.
“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.