High Risk Mechant Account: Third Party Payments Aggregation

Posted on Thursday, April 24, 2008 by Bryan Johnson

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 two 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. 

Here is an example of TPPA risk. Let's say over a 30 day period a merchant sells 5,000 sporting event tickets for $1,000,000 (that they don't control/own). The merchant then pays the event sponsor the monies due minus their fees. At the last minute, one of the athletes scheduled for the event get's hurt and is unable to participate.  The event sponsor would normally refund the merchant for any cancelled event but this case happens to fall into a gray area and the event sponsor refuses to pay the money back. The cardholders who purchased the tickets then begin calling the merchant for a refund but the merchant doesn't have a sufficient amount of money to refund all the requests. When the cardholders don't get the refund they're demanding, they call their bank to file a chargeback. Before long, the merchant is facing thousands of chargeback disputes totaling in the $800,000 range. The merchant defaults on their obligation and the merchant account provider is next in line with the responsiblity of paying the $800,000. All that risk and work for a measly few thousand dollars in gross revenue. 

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

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