Traditional Merchant Accounts vs. Aggregators
Not all merchant accounts are created equal.
When shopping for a merchant account, many tend to overlook the differences between the two very different merchant account types; the traditional model and the aggregator model.
The traditional model works as one might expect. A merchant contacts their MSP, and opens a merchant account. This MSP will have relationships in place with financial institutions as well as frontend and backend processors. While the nature of these relationships can vary, at a bare minimum, the MSP will facilitate the inception of an account with their partner financial institution on your behalf, and solely for your use.
The aggregator model is a bit different. Although the infrastructure remains largely the same, aggregator companies (such as PayPal and Stripe) actually play the role of the single merchant account holder in the hierarchy, and then process transactions through this single account on behalf of their customers.
The quickest way to identify which type of account you are opening is to evaluate the amount of information requested to open an account. In the traditional manner each merchant is provided their own merchant account via an FI, therefore they are required to meet the same requirements in place to open a traditional bank account, and go through an underwriting process to verify information provided and substantiate the business. These accounts also must comply with portions of the Patriot Act of 2001, which requires financial institutions to take extra steps in identifying their customers in an effort to combat international money laundering and the financing of terrorism.
Aggregators, on the other hand, are simply reselling the use of a single merchant account in their name, and take on the risk of managing all their own accounts internally. These accounts can often open accounts online, and often with instant approval.
Neither one of these is inherently better than the other, and each have their perks and drawbacks. Aggregator accounts are very popular due to their fast account opening and simple terms but can be subject to lower limits and longer holds on their accounts due to the comparatively lax identification requirements which expose the provider to more risk. A traditional merchant account typically alleviates these constraints but can come in at a higher cost or level of merchant involvement.
Since there isn’t a right or wrong choice here, it all comes down to understanding the needs of you and your business. If you aren’t sure which one is right for you- feel free to give one of our experts a call. As a longtime merchant advocate, we will point you in the right direction, even if that direction is one of our competitors.