Credit Card Factoring

by Mark Wilson

Credit Card Factoring: Are you sure your merchant account is sufficient for your current business operations? If you are selling something significantly different, or through a different avenue, than when you acquired your merchant account, you could be setting yourself up for big problems!

As most merchants are probably aware, the processing of Visa or MasterCard credit cards are conducted by sponsored "underwriting" card acquiring banks. This payment processing environment is regulated by rules promulgated by the aforementioned card associations of Visa and MasterCard.

These two card labels are actually associations of various (card issuing) banks and every year they redefine rate categories, decide on rate changes, and periodically modify the rules and regulations of their industry. Most of these regulations are designed to reduce the risk value inherent to the credit card industry, and as the types of risk in the environment change this is reflected in the alterations to the rules, regulations, and rate definitions.

One of the longest held rules is that of both Visa and MasterCard to prohibit the occurrence of "factoring." This term refers to an approved merchant processing the (credit card) sales of a non-approved business through their merchant services account. By "approved" I am referring to a merchant (whose definition would include the business type, the business in particular, and the owner or principles themselves) that has been evaluated for risk by a particular card acquiring (i.e. payment processing) "underwriting" bank and approved for handling its credit card sales processing. 

Although the majority of the industry considers factoring as the most obvious use of the term (i.e. one particular business owner running the sales of another completely different person's business through their merchant account), the most common occurrence of factoring actually occurs within a single corporation or small business owner's group of companies. Not aware of the definition of factoring, the individuals involved in establishing the new business entity considers the first merchant account sufficient. 



An example would be a corporation running a small retail shoe store with aspirations to open a new business under the same corporate name, but selling magazine subscriptions on the Internet instead. Although the corporate name would be the same, it would obviously have a completely different d.b.a. and SIC code. The risk level of the Internet magazine subscription sales company is considerably higher than that of the retail shoe store and thus would probably not be approved for processing by the same underwriting bank that is handling the merchant services presently.

The person (or people) involved in setting up vendor accounts for the new business entity, either unaware of the need for a different account or aware of the fact that they would probably not be approved by the same low risk retail credit card bank, might attempt to run the sales for the new company through their preexisting credit card account. From a strictly technical aspect, this might work for a while. But if they are ever caught there could be serious repercussions to the originally approved merchant. These could range from simply having their merchant account terminated and ending up on a TMF (Terminated Merchant File) so that they will in all likelihood never have a merchant account again, to having hefty fines levied against them  in Tampa, Florida. 

Mark Wilson is President of Advanced Payment Solutions located in Tampa, Florida. He can be reached via telephone at (813) 985-5600 or email at GlobalAPS@aol.com. You may visit his web site at http://www.apscreditcards.com.

 
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