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 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 extreme example to demonstrate the risk of a TPPA account. Let’s say over a 30 day period an ecommerce merchant sells $1,000,000 dollars worth of vitamins that they have on net 30 terms from a wholesaler. The merchant could collect the $1,000,000 dollars, not pay the wholesaler, and then skip town with a suit case full of money. Each customer will soon be initiating a chargeback because the vitamins they paid for did not arrive.

When the chargebacks are initiated, the issuing bank will credit the cardholders account but because the merchant is nowhere to be found, and the business has no assets, the merchant account provider is left with $1,000,000 dollars in in liabilities.

This example of course suggests intentional fraud is at the core of the liability, but it also happens in other circumstances, e.g. an online booking site accepts payment for airfare and then the airline declares bankruptcy.

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 merchants 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.