Merchant Account Provider or Aggregator -Merchant Service

May 11, 2021 Written By Jessie Lee

In the United States, credit card payment industry can be roughly divided into two parts, acquirers (Acquirer / Card Processor / Merchant Account Provider) such as First Data, Elavon and TSYS, etc., and emerging payment technology companies (Payment Service Provider / Payment Aggregator) such as PayPal, Stripe, Square, etc.

Emerging technology companies are not disrupters, they have not reshaped the industry, but just have entered the market with a different service model as essentially third parties that connect small merchants with acquirers.

Aggregators developed their own payment gateways and connected to the acquirers’ card processing systems as ISOs(Independent Sales Organization) or MSPs(Merchant Service Provider) to connect card networks to complete the payment process. The world's largest acquiring institutions First Data and Elavon are the main processors supporting these aggregators, while they also provide their own gateways + processing, a full set of services.

The acquirers are also called Merchant Account Providers, and each client (aggregator and merchant) they serve get an exclusive Merchant Account and MID which can be recognized by the card networks. When processing transactions, all participants including card issuers, acquirers, card associations, etc., every part knows which qualified merchant they are serving; while aggregators share their own Merchant Accounts and MIDs to all merchants they serve. Therefore those small merchants don’t have to go through the long application process to accept credit card payment. Under the aggregator service, the card networks only know that they are serving the aggregator but don’t know information about the specific merchant in transactions. For example, all transactions on PayPal are processed with PayPal's MID and all payments collected by PayPal's Merchant Accounts.

(Aggregators also provide an independent account for each merchant they serve. PayPal even calls this independent account Merchant Account too, but they are actually not the same. Aggregators’ independent account assigned for merchants are only for internal identification, can not be recognized by the card networks.)

There are many benefits for merchants to have your own Merchant Account and MID, but it takes a little effort to obtain from acquirers. Merchants need to submit information about the company registration/marketing/finance materials, payment history, and sometimes even the owner's personal information for undewriting, which takes one to several weeks The purpose of rigorous underwriting is to make sure that merchants’ businesses are truthful and legal. Once get approved, it means that merchants with MIDs have been accepted by the card networks and will start cooperation based on trust.

Merchants who share aggregators’ MIDs basically only need to answer simple questions almost like "Who are you, where you from and where do you go?" before boarding. Applying in the morning and getting approved in the afternoon. This is an important to attract small businesses and startups. However, when aggregators do not know anything about merchants which is an extra risk, they have to monitor transactions more strictly, and withhold part of transaction funds as security deposit to deal with possible risks. Some small businesses’ accounts were even unilaterally closed by the aggregators without notice or negotiation. After all, for aggregators, overreaction is better than being suspected of colluding with merchants in fraud or something else to sink the ship. There are numerous new merchants waiting out there, no need to take any risk for any single merchant.

The risks acknowledged in the industry include changes in business models, larger transaction volumes than expected, and significant increases in sales/international orders/chargeback rates within a short period of time. The difference between whether there is a MID or not becomes obvious. In fact, these phenomena are very common in start-ups. Imagine that a company has worked so hard to develop a successful product and sell well, suddenly the funds are frozen for 180 days for high speed growth... That's why some medias call these aggregator service providers ticking time bombs.

The suggestion for merchants is that, with legal operations, branded/corporate-operated merchants, even start-up companies, appling for merchant account and MIDs is wiser. Spending a few more days to submit the information, and the future be with less troublesome; and for those small businesses who have a stable monthly income of several thousand dollars, there is not much differences under which service model.