n aggregator is a processor that funnels multiple merchant transactions through a single merchant account. The card Association rules generally forbid aggregation.

To gain a better understanding of aggregation, think of a simple brick-and-mortar retailer, such as a shoe store. Let's say the shoe store, which has its own merchant account, resides next to a bookstore that does not have a merchant account.

From time to time, the bookstore owner pops in next door to run a few of his transactions on the shoe store's merchant account.

The card Association rules, however, strictly forbid this kind of activity. The reason is very simple: Banks calculate risk and pricing based on the merchant whom they know, not on the merchant next door who happens to enter transactions into a POS terminal to which he does not have rightful access.

We all know that a lot of merchants can't get (and often do not deserve) merchant accounts. There are countless examples of unscrupulous call centers and other MO/TO operations that have difficulty looking legitimate to prospective acquiring banks. Occasionally, an "entrepreneurial processor" gets the idea to acquire a merchant account through which it will place the transactions of those merchants who cannot obtain their own merchant accounts.

Apart from the fact that the card Association rules and even some laws forbid aspects of the aggregation model, as a merchant level salesperson (MLS), keep the following in mind should you ever encounter an aggregator:

Illegal

Chances are, the structure of the aggregator is illegal. Not only are the card Association rules clear on prohibiting this kind of business model, but common laws concerning the illegality factor will present major legal hurdles for any aggregator operation.

Dangerous

There is a good chance that the products being sold by merchants using the aggregator are either not reputable products or they are the types of products with which you do want your merchants to be associated. Some aggregators use the aggregation model to facilitate in the sale of illegal products. Be careful.

Pricing

Because aggregators push large volumes of transactions through a small number of merchant accounts, sometimes they can offer pricing that is surprisingly low. Again, be cautious.

Aggregator models are not stable, and a merchant placed with an aggregator should not expect to process without interruptions. Some high-risk aggregators charge very high rates because their merchants are simply unable to find processing elsewhere.

Agent Life

Aggregators, like all processors, need you to promote their services. When signing up deals with processors, look closely at their business model; make sure that you know if you are dealing with an aggregator.

One reasonable indicator of an aggregator is that the processor works with an offshore bank (i.e., outside the United States). Some aggregator MLSs earn a lot of fast money, and some loose money fast. As acquiring agents, you are faced with ethical and legal dilemmas every day.

Merchants constantly try to portray themselves as better accounts than they really are. Those merchants who are so problematic that they cannot hide their problems will usually turn to aggregators for help.

MLSs sometimes sell for aggregators and do not even know it. Ask the processor for which you sell if it is an aggregator. As an agent, you must know this basic fact about the product you promote.

E-Wallets

E-wallet companies are a legally tolerated form of aggregator (an example is eBay Inc.'s PayPal). When an e-wallet company sells you some e-cash, and you redeem that e-cash at a merchant, the merchant is more in compliance with the rules and the law than had the transaction occurred without the e-cash barter transaction.

Resilience

As much as aggregators are controversial from a legal perspective, my view is that they will never disappear. In fact, the ever-increasing regulation of the acquiring industry, that will shut more and more merchants and agents out of the acquiring business, will be the fertile ground in which aggregators flourish.

As everyone in this industry knows, the hunger for a merchant account is significant. The consumer demand to buy products from merchants who cannot obtain legitimate merchant accounts is also significant.

One needs only to have an e-mail account to get a sense of the number of such merchants in existence. The best examples are online pharmacies selling illegally imported generic drugs. These merchants often use aggregator models because they are not permitted to have legitimate merchant accounts.

Aggregated by Mistake

Some merchants use aggregators because they did not know that they could obtain a normal merchant account. These are usually small Internet merchants without much knowledge of the merchant account market.

Some are merchants who have a legitimate product to sell but have trouble screening for fraud and keeping their chargebacks low enough to maintain a normal merchant account.

As an MLS, you may encounter merchants like this who are hooked on aggregators. Help these merchants break the habit by counseling them on ways in which to reduce fraud and chargebacks in their accounts. If you do not know how to do this, speak to the bank for which you are an agent, and the bank should be able to give you some leads for fraud-screening services.

Volume

You might be surprised to know how much dollar volume passes through aggregators in any given month. Some see this volume as a very risky piece of business; others see it as an opportunity to profit.

Whatever your relationship with aggregation, I recommend showing extreme caution. Some individuals are tempted by aggregation because of the big dollars involved. Be aware that the risk of legal liability is commensurate with the dollars processed. In other words, big money equals big risk.

In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If you require legal advice or other expert assistance, seek the services of a competent professional. For further information on this article, e-mail Adam Atlas, Attorney at Law at atlas@adamatlas.com or call him at 514-842-0886.