High Risk Mechant Account: Third Party Payments Aggregation

Third party payments aggregation (TPPA) is a description used for merchants that are selling a product or service that they do not own. The best example of a TPPA (aggregator) is PayPal. They simply facilitate the exchange of money between two parties.

There are, however, different shades of TPPA's. For example, an online air travel booking site may charge both their service fee and the actual airfare in a single transaction. If the merchant were only charging their service fee, they would not fall into the TPPA category as they are simply charging for the service they provide. But because they are also charging a credit card for a product they do not own, an airfare ticket, they fall into the TPPA category.

The value proposition of a TPPA is clear to both consumers and merchants, but the increased risk is not normally understood as well by the merchant. There are a few reasons why TPPA's are considered higher risk in the credit card processing industry: 1) The merchant has reduced control over the quality and delivery of the product being sold, and 2) The merchant is being trusted to pay the third party for the money they've collected on their behalf. 3) The business that owns the merchant account is responsible for all transactions charged by that account even though a majority percentage is passed onto a third party. Given the merchant account owner only keeps a small percentage of the total transaction amount there is uncertainty as to whether the merchant account owner will have the financial where-with-all to stay in business and have the ability to cover potential refunds or chargebacks.

Here is an example of TPPA risk. Let's say over a 30 day period an ecommerce merchant sells $1,000,000 worth of tickets for a third party event (something they don't control/own). The merchant could collect the $1,000,000 dollars from the cardholders, not buy the tickets from the event organizer and then skip town with a suit case full of money. Each customer would initiate a chargeback because they never received the tickets they purchsed. When the chargebacks are initiated, the issuing bank will credit the cardholders account and merchant processor will in turn try to debit the merchant's account which does not have any money.

The example could just have easily been that the event organizers cancel the event at the last minute for legitimate reasons and then refuse to refund the merchant who sold the tickets on their behalf. Either way, the point is that an unrelated third party greatly complicates the risk of processing risk.

Because the Card Associations have discouraged the practice of TPPA and the increased risk, most merchant account providers are justifiably reluctant to underwrite these types of accounts. That is not to say that merchant accounts cannot get approved for TPP processing, it is just more difficult and the underwriting conditions will more likely include a reserve and other similar safeguards.

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