The Positive Impact of MasterCard’s Recent Charge-Volume Threshold Increase

[This article first appeared in “MasterCard: Sub-Merchants Don’t Need To Own Accounts Until Volume Hits $1 Million” on Digital Transactions]

In what observers say indicates a growing acceptance of merchant aggregation by payment networks, MasterCard Inc. has increased by 10 times the charge-volume threshold at which a so-called sub-merchant must get its own merchant account. In addition, MasterCard’s recent rule changes preserve back-office settlement procedures that, had the old $100,000 threshold been retained, could have meant operational hassles for so-called Payment Facilitators as more sub-merchants hit that volume mark.

The new threshold is now $1 million in annual MasterCard volume. MasterCard’s changes, announced in an October bulletin for merchant acquirers, follow by six months various changes by Visa Inc. that also streamline aggregation, according to Deana Rich of Los Angeles-based Rich Consulting, which specializes in merchant risk and aggregation matters. Visa, however, for now is sticking with its $100,000 threshold in annual Visa volume at which a sub-merchant must get its own merchant account.

Under the aggregator model, an entity known as a Payment Facilitator or Payment Services Provider holds a merchant account and allows small merchants, dubbed sub-merchants, to submit transactions into the bank card networks under that account. The Payment Facilitator is primarily responsible for risk control. This system enables new or very small merchants that otherwise might not pass a full-blown underwriting screen to accept card payments without having a traditional merchant account. Two of the most famous merchant aggregators are PayPal Inc., and Square Inc., but MasterCard’s merchant Web site lists dozens of others.

One of those facilitators is Walnut Creek, Calif.-based YapStone Inc., which specializes in providing online payment services for large property managers, small apartment owners, vacation rental properties, and other merchants. One of the companies YapStone serves is HomeAway.com Inc.’s Vacation Rentals by Owner (VRBO), which lists privately owned properties available on a short-term basis. VRBO has about 1 million listings, and 200,000 of its users are YapStone sub-merchants, says Michael Denbeau, vice president and general manager of rent.

YapStone’s average ticket is about $1,000, far higher than MasterCard’s average U.S. credit card sale of $90, according to data released with MasterCard’s third-quarter earnings report. It is not unusual for many VRBO sub-merchants to hit $100,000 in annual MasterCard volume, so Denbeau welcomed MasterCard’s change. “This will actually greatly benefit us,” Denbeau tells Digital Transactions News. “We deal with very high average-ticket transactions.”

MasterCard did not respond to a Digital Transactions News request for comment.

Many sub-merchants don’t have the financial standing or the desire to deal with what they perceive to be the aggravation of getting a regular merchant account, according to Denbeau. “This whole aggregator market … is built for the sharing economy,” he says, noting that it’s cleared the way for such firms as Square or ride-sharing app developer Uber to bring electronic payments to many thousands of new businesses. “It enables merchants who in the past could never be [card-accepting] merchants on their own,” he says.

Payment thresholds are something merchants easily understand, while the settlement flows in aggregation are less visible but crucial, according to Rich. At the $100,000 level, both MasterCard and Visa required a so-called tri-party agreement between the Payment Facilitator, the sub-merchant and the acquiring bank serving the facilitator. “In addition, MasterCard, but not Visa, required at that threshold that the settlement cannot be made to the payment facilitator, but instead must go directly from the acquiring bank to the sub-merchant,” Rich said in a posting about the changes on the LinkedIn social network. Rich’s post appeared in the Payment Facilitator discussion group on LinkedIn.

Sending funds directly to sub-merchants sometimes posed operational problems for facilitators. In some cases “they would ask MasterCard for variances, or just ignore the rule,” Rich says. With the new $1 million threshold, however, MasterCard’s settlement process will remain as it was for volumes under $100,000 when the old threshold was in effect. That means settlements will continue to go to the Payment Facilitator instead of directly to the sub-merchant until its volumes exceed $1 million in MasterCard transactions.

The hassles of settlement directly to the sub-merchant are two-fold, according to Rich. First, different network procedures mean more work for Payment Facilitators and acquirers. Second, many Payment Facilitators are primarily software providers or resellers, and they’ve added the payments piece into their products. So differing procedures at the network level mean more work for them, too.

Denbeau predicts MasterCard’s threshold change will force Visa to do the same, but Rich doesn’t see a need for it. “Getting the tri-party agreement is not the hard part,” she says. “The hard part is the settlement, and Visa already has the settlement piece covered by allowing settlement to continue to go the Payment Facilitator.”

In addition, Visa’s changes last spring cleared up some confusion about the definition of a Payment Facilitator, according to Rich. In her LinkedIn post, Rich said both networks’ recent changes are “an expansion and maturation of the Payment Facilitator program on both sides. MasterCard increasing the limits to $1 million is a recognition that the model is working. Visa’s further clarification of the definitions helps everyone better understand who is a Payment Facilitator and who isn’t. I think these rule changes will help the market grow, and I’d expect much more expansion in the future.”