Merchant Aggregation: Growth Opportunity or Compliance Burden

Navigator Edition: January 2016
By: Brooke Ybarra

We, like many in the card acceptance industry, have observed a trend toward merchant aggregation business models. Several well-known companies employ a form of aggregation, including companies that consumers think of as merchants, such as Uber, and companies that look more like ISOs and acquirers, such as Square and PayPal. Aggregator models have become significant and represent more than $400 billion in volume in the U.S. While the aggregator model represents a potential growth opportunity for the acquiring market, it also introduces risks that acquirers must be prepared to address.


In the aggregation model, one company enables many sub-merchants (also known as sponsored merchants) to submit transactions to an acquirer without the sub-merchant having a direct contractual relationship with the acquirer (See Figure 1). An aggregator sits between the acquirer and the end merchant and may be referred to as a merchant aggregator, merchant of record, master merchant, or payment facilitator. The payment facilitator term is relatively new to the U.S. market and is the only term related to aggregation that Visa and MasterCard define in their rules (see Figure 2). The distinction in terminology is not simply semantic, as it has a bearing on the aggregator’s treatment by the card brands and the acceptance-related functions it is permitted to perform. Both networks require that a payment facilitator’s acquirer register it with the card networks and have various other compliance mandates.

Figure 1: Basic Aggregation Business Model

Figure-1_-Basic-Aggregation-Business-ModelSource: First Annapolis Consulting market observations.

Figure 2: Payment Facilitator Definitions

Figure-2_-Payment-Facilitator-DefinitionsSource: Visa Core Rules, October 2015; MasterCard Rules, May 2015.

The aggregation model is not new in payment acceptance. It has been standard practice for decades in petroleum retail, for example. The business models employed by different aggregators vary, particularly with regards to:

  1. The contractual arrangements between the acquirer, aggregator and sub-merchant; and
  2. The flow of settlement funds (mainly whether the aggregator receives settlement and subsequently disburses it to its sub-merchants or whether the sub-merchant receives settlement directly).

The motivation for using an aggregation model is often related to the aggregator’s desire to control aspects of the customer (sub-merchant) experience. In a way, companies like Square breathed new life into aggregation, enabling card acceptance and offering an easy-to-use, accessible customer experience for a large number of micro- and small-business merchants in card-present environments.

Benefit or Burden?

Aggregators often target new or non-traditional card acceptors, and therefore growth among aggregators has potential benefits for the acquiring industry at large. Aggregators want acquiring offerings with efficient sub-merchant boarding processes and flexible reporting options, among other features. Many acquirers have responded to the demand by developing and promoting programs and platforms designed specifically for payment facilitators.

Because aggregators sit between the acquirer and the end merchant, however, aggregation presents certain risk and compliance considerations for the industry. In the eyes of the card networks, the acquirer is responsible for the compliance and card acceptance-related actions of both the aggregator and its sub-merchants. As such, acquirers need to be comfortable with the aggregator’s KYC and underwriting processes, or the acquirer needs to handle it directly. If the aggregator is receiving and disbursing settlement, the aggregator itself represents a credit risk (though there is some ambiguity to this), and the acquirer should ensure the aggregator is not using settlement funds as working capital. Moreover, in the case where the aggregator receives settlement funds on behalf of sub-merchants, the aggregator must navigate the complexities of money transmitter licensing requirements and determine whether and in what states it needs to obtain licenses.

We expect the aggregation model to continue growing. Developing support models and offerings specific to aggregators may be a significant opportunity for acquirers over the next several years, but it is important to also consider and plan for the increased risk inherent in such models.

For more information, please contact Brooke Ybarra, Senior Manager,, specializing in Merchant Acquiring.

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