Mobile Acceptance Spurs Interest in Aggregation to Sign Merchants in Bulk

As more and more companies vie to put mobile card-acceptance gear in the hands of tiny merchants, acquirers are starting to look at signing up merchants on their own merchant account rather than using the more traditional—but also more time-consuming–process of establishing an account for each seller.

The method isn’t exactly new. PayPal Inc. has been signing merchant clients on its own account almost from the day it launched in 1998, for example. But the explosive potential for mobile acceptance has underscored the method’s advantages for boarding multiple merchants quickly and efficiently. Many, if not most, of these merchants are more like consumers, users that have only an occasional need to accept cards to sell items door-to-door or at craft fairs. Others are regular sellers but generate either very low volumes or high risk, or both.

These factors make underwriting for a conventional merchant account a tricky proposition, experts say, especially for so-called micro-merchants that can’t be counted on for large or predictable flows of transactions. “The process of getting these merchants into the system [with their own merchant account] is a lot of work,” says Todd Ablowitz, president of Centennial, Colo.-based Double Diamond Group LLC. “A lot of that is still very manual.”

Yet, the number of small sellers using a mobile device will more than double from 1.5 million in 2011 to 3.2 million this year and reach 12.5 million by 2016, according to estimates released last week by Boston-based Aite Group LLC.

Some startups in the mobile-acceptance market have thrived by signing hundreds of thousands of very small merchants seemingly overnight. Two-year-old Square Inc., for instance, has recruited about 1.2 million merchants for its system, which lets sellers swipe cards through a dongle that attaches to a smart phone via the phone’s audio jack. And last month PayPal launched a competing product called PayPal Here. On Wednesday, eBay Inc. chief executive John Donahoe revealed that the new service, which isn’t yet fully rolled out, has attracted more than 200,000 merchants. PayPal is a unit of eBay.

Both PayPal and Square rely on a so-called payments-aggregation approach that lets tiny merchants piggy-back on the processor’s merchant account. To help independent sales organizations and other processors use the same model, Double Diamond Group and Rich Consulting Inc., Van Nuys, Calif., last week announced they are teaming up to offer consulting services, including advice on how to set up merchants and control transaction risk. Apparently there is plenty of appetite for aggregation among ISOs and other acquirers. “I’ve never seen anything like it,” says Ablowitz, who promoted the new consulting service at this week’s Electronic Transactions Association conference in Las Vegas. The reaction, he says, has been “wow, this is huge.”

Helping whet that appetite are recently enacted rules changes at Visa Inc. and MasterCard Inc., say Ablowitz and Deana Rich, president of Rich Consulting, a specialist in risk management for acquirers. Previously, Visa allowed payments aggregation only for merchants that sold on the Web. Now, the network allows the model for physical points of sale, as well, an approach also adopted by MasterCard. Merchants that exceed $100,000 in annual card sales for either brand, however, must establish a conventional merchant account. “There are lots of merchants where it would take you a while to get to $100,000,” notes Ablowitz.

The advantages of aggregation include a streamlined boarding process for new merchants. “Underwriting time frames are very short,” says Ablowitz, compared to the process for a merchant account. The process also lets acquirers service micro-merchants in bulk, making them more profitable. “It gives new vectors for scale,” Ablowitz says.

While Square in the months after its early 2010 launch and PayPal in its early days struggled to control fraud losses, the consultants say risk can be managed with aggregation. “Underwriting doesn’t go away, it shifts focus,” says Rich, who adds that processors must adjust their systems to monitor transactions, fraud, and funds flows after merchants start using their services.

Both consultants also point out how ISOs and others can benefit from the experience of pioneers like PayPal. “They don’t have to go through PayPal’s learning curve,” says Ablowitz.